Competitors shoot holes in FHA coverage

by Donald Horne28 Aug 2015
Federal Housing Administration (FHA) loans have made home ownership possible for tens of thousands across the country, but private market competitors are exploiting one weakness that could benefit clients.

“The total cost of MI (mortgage default insurance) over the life of a loan on a $200,000 home with 3% down would be $36,379 with FHA and $18,480 with United Guaranty,” says Bryon Jones, senior vice president in charge of strategic accounts for the latter. “The home buyer would save $17,899 with us.”

He’s not alone with other private default insurers in the market pointing to the same discrepancy in costs as market competition heats up.

Unlike FHA, private mortgage insurance cancels automatically when the principal balance of the loan reaches 78 percent of the original value of the property, whereas FHA insurance cannot be cancelled if the home buyer has made a down payment of less than 10%. (FHA insurance remains in place for 11 years when the home buyer pays 10 percent or more down.)

It is an opportunity for other lenders to highlight those differences for borrowers, says Jones.

A recent article in The Los Angeles Times has described the higher FHA costs as “onerous,” stating that borrowers with minor credit dings are increasingly being steered into FHA mortgages with higher costs that are described as “a poor person's tax” by John Taylor, chief executive of the National Community Reinvestment Coalition, a financial advocacy group for lower-income and minority neighborhoods.

Credit is loosening, but only to a degree. Fannie Mae, Freddie Mac, and FHFA are all working to encourage lending to lower-income buyers by reducing certain fees and by allowing down payments as low as 3%, which the GSEs approved in late 2014.

COMMENTS

  • by Keith | 8/28/2015 10:06:37 AM

    Freddie and Fannie require 7 years after a foreclosure! So the banks get bailed out by the people but the people get screwed again...

  • by John | 8/28/2015 3:11:38 PM

    FHA insures 100% of the mortgage. PMI only insures the top 25%, so it would make sense that PMI would be dropped at 78% mortgage to value. If anything, it was foolish in the past for FHA to drop the MI payments when they would continue to be liable for claims. Frankly, it seems like a lot of hype to me anyway, because nobody keeps a mortgage - especially an FHA mortgage - for 30 years anyway. And before anyone tells me that there is more likelihood today since rates are at an all time low and expected to go up, let me say that FHA mortgages are also assumable. That is much more of a benefit than the insurance is a detriment. 7 or so years form now when you are looking to sell that house and move up, you still have that 3.50% on your FHA mortgage. Even if you do have a .85% MI payment to go with it you'd be at 4.35% total when rates could be 6.50%. Tell me that's not an incentive for a buyer.

  • by Pat | 9/1/2015 9:01:32 AM

    So true John. Typical article where someone spews all the negatives, but omit the benefits. Fact is, when rates rise (and they always do), sellers with FHA mortgages will be in high demand since their mortgages are assumable. This happened many many years ago when rates were much higher. But next time, it will be a mad house with FHA sellers having rates at 3 percent plus. What a sellers market they will have. As for realtors who love to beat up on FHA, they SHOULD be touting the benefits of having FHA when rates rise - if they could think that far in front of their wallet..

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