Last week, President Barack Obama announced that, at the end of this month, the U.S. Department of Housing and Urban Development (“HUD” or “Department”) will implement a 50-basis-point reduction in the annual mortgage insurance premium (“MIP”) borrowers pay to obtain a Federal Housing Administration (“FHA”) insured loan. On Friday, HUD released Mortgagee Letter 2015-01, as well as instructions on FHA Case Number assignments, which include details about the timing and scope of the annual MIP reduction. Below, we summarize these events.
FHA Annual Premium Reduction
In Mortgagee Letter 2015-01, HUD announced revised annual MIP rates for most FHA-insured, Title II forward mortgages. Specifically, for FHA-insured loans with terms greater than 15 years, the Department will reduce the annual MIP rate by 50 basis points. Depending on the loan amount and loan-to-value (“LTV”) ratio, the new annual MIP rates will range from 80–105 basis points. For example, for an FHA-insured loan with a term greater than 15 years, a base loan amount less than or equal to $625,500, and an LTV ratio greater than 95%, the annual MIP rate will be reduced from 135 to 85 basis points. The reduced annual MIP rates will apply to FHA-insured purchase-money loans, as well as FHA-insured refinance loans with loan terms greater than 15 years. The annual MIP rates for FHA-insured loans with terms of 15 years or less remain unchanged. HUD also did not make any changes to the upfront MIP paid by borrowers at the closing of FHA-insured loans at this time.
Mortgagee Letter 2015-01 contains a notable exclusion from the annual MIP rate reduction announcement. Pursuant to a policy implemented in 2012 that was designed to encourage borrowers with existing FHA-insured loans to refinance into a lower rate loan without incurring a higher annual MIP rate, the annual MIP rate for single-family streamlined refinance transactions that refinance existing FHA-insured loans that were endorsed on or before May 31, 2009, has remained at 55 basis points. When HUD increased annual MIP rates in 2013, it excluded this specific subset of FHA streamlined refinance transactions from those increases. Similarly, Mortgagee Letter 2015-01 excludes this limited subset of streamlined refinance transactions from the Department’s most recent announcement, to provide borrowers with existing FHA-insured loans endorsed on or before May 31, 2009, the continued opportunity to refinance into another FHA-insured loan while maintaining an annual MIP rate of 55 basis points. Mortgagee Letter 2015-01 also excludes loans insured under Section 247 of the National Housing Act from the most recent annual MIP reduction announcement.
Premium Decrease Effective Date and Opportunity to Cancel Existing Case Numbers
HUD announced in Mortgagee Letter 2015-01 that the 50-basis-point annual MIP rate reductions will be effective for case numbers assigned on or after January 26, 2015. Moreover, to assist mortgagees in providing the lower annual MIP rates to current loan applicants, the Department will permit mortgagees to cancel the current FHA Case Number for any loan application that has not yet closed and reorder an FHA Case Number on or after January 26, 2015.
HUD’s approval of FHA Case Number cancellation requests based on the new MIP rate will be temporary. Specifically, for loans that have an FHA Case Number assigned, but that by have not yet closed, FHA-approved mortgagees can begin submitting case number cancellation requests on January 15, 2015. All FHA Case Number cancellation requests based on the annual MIP reduction must be submitted on or before February 25, 2015. Detailed and specific instructions for completing case cancellation requests based on the annual MIP rate reduction can be found here on HUD’s Case Processing Requirements webpage. While mortgagees can request FHA Case Number cancellations under this temporary authority on either a bulk or an individual loan basis, the requests must be submitted separately from any case cancellation requests based on other reasons. Moreover, all bulk cancellation requests based on the annual MIP reduction must be grouped by FHA Homeownership Center (“HOC”) jurisdiction and sent via separate e-mails. HUD will not accept cancellations requests received directly from borrowers. Finally, HUD’s case cancellation instructions make clear that mortgagees should not order a new FHA Case Number until (1) on or after January 26, 2015 and (2) the mortgagee confirms that the old FHA Case Number has been cancelled.
Impacts of the FHA Annual Premium Reduction
The full effect of the FHA premium reductions remains unknown; however, this policy change will likely spark a modest refinancing wave for existing FHA-insured loans. Typical FHA loans are less likely to refinance than their conventional counterparts; however, once the annual MIP reduction takes effect, we can expect new refinance activity by borrowers with existing FHA-insured loans who want to take advantage of the low interest rate environment, coupled with the decreased annual MIP payment. Any anticipated refinancing activity could have an effect on the value of the Ginnie Mae securities in which the FHA-insured loans being refinanced have been pooled, as loans within existing pools are expected to pay off more quickly as a result of the refinancing activity.
With regard to the economy and homeownership, Obama Administration officials predict that this policy change could save the average homebuyer $900 a year, help 800,000 borrowers who refinance their mortgages save money, and expand the credit box for 250,000 new homeowners who were previously shut out due to the higher premium costs over the next three years. In his speech last week, the president suggested that the monthly cost savings of $900 per month would help to further stimulate the economy, in addition to achieving the Administration’s stated goal of increasing mortgage credit availability to creditworthy borrowers.
Just a few weeks before the State of the Union address, this most recent announcement from HUD and the White House fits into the president’s larger narrative of appealing to the Democratic base. Consumer groups praise the move and are requesting similar reductions at the GSEs. Reactions from Republicans in Congress were swift and unfavorable, particularly in light of the recent FHA Actuarial Report release, which showed that the FHA’s Mutual Mortgage Insurance Fund remains below the statutorily required two percent capitalization requirement. HUD Secretary Julian Castro acknowledged that the FHA annual MIP reductions will require the Department to push back the date by which it thinks it can achieve the statutorily required two percent capitalization of FHA’s Mutual Mortgage Insurance Fund “by a few months.” In a letter to Secretary Castro from Chairman of the House Financial Services Committee (“Committee”), Jeb Hensarling (R-TX), Representative Hensarling indicated that the Committee would hold a hearing in February and requested, in advance of that hearing, that FHA recalculate the value of FHA’s Insurance Fund, subtracting out any benefit from recent Department of Justice settlements and the value of the $1.7 billion mandatory appropriation the FHA received in 2013.