FHA Loans Decline as Cost Increases Near

by 20 Feb 2013

With increases in the cost of taking out an FHA loan set to rise April 1, the market share of closed FHA loans has declined to the lowest level in more than 18 months even as the agency is countng on revenues from increased mortgage insurance premiums to make up for its record deficit.

Only 18 percent of all loans originated in January were FHA loans, a decline from 19 percent in December and 27 percent below the average market share of 23 percent for FHA loans in 2012, according to Ellie Mae’s January Origination Insight Report.  The January level was lower than any month since the Ellie Mae report began in August 2011.

On April 1, FHA ill raise the annual mortgage insurance premium paid by borrowers on most new FHA loans by 10 basis points, or 0.1 percent, which the agency expects will add $13 a month to the average borrower's monthly payments. FHA will also increase premiums on jumbo mortgages (those $625,500 or bigger) by 5 basis points or 0.05 percent, to 155 basis points -- the maximum currently allowed by law. Certain streamline refinance transactions will be excluded from the premium increases, the agency said.

The agency is saddled with as much as $16.3 billion in debt due to defaults on loans it insured as the housing market crashed and is facing the grim possibility of asking Congress for a bail out in the midst of the rancorous debate over the budget deficit.

Among the changes taking effect is a change in FICO scores.  Borrowers with FICO credit scores below 620 and a total debt-to-income ratio of more than 43 percent will not be eligible for processing through FHA's automated underwriting system after April 1.  They will have to be processed manually, with lenders documenting compensating factors such as a larger down payment or a higher level of reserves.

The median FICO score for FHA refinancing loans approved last month was 715 and the debt-to-income ratio was 24/38.  For FHA purchase loans, the median FICO was 699 and the median DTI was 28/41.  FICP scores for closed conventional loans were considerably higher, 763 for refis and 760 for purchase loans, according to Ellie Mae.