In order to compensate for a budget shortfall potentially reaching into the billions of dollars, the Federal Housing Administration (FHA) will require homeowners with FHA loans to pay increased monthly insurance premiums for a longer period.
The measure means borrowers with FHA-insured mortgages will have to make increased monthly insurance payments for years longer than they had anticipated. More importantly, it means FHA loans may no longer be as attractive to consumers as they once were.
For nearly 80 years, the FHA has helped bolster the housing industry by offering low interest loans at a lower qualification threshold. Typically these loans require smaller down payments at interest rates lower than what most private banks are able to offer.
Indeed, the FHA has been a great deal for many American homebuyers, particularly those with less-than-stellar credit. But with the agency now facing a potentially huge budget shortfall, it has no choice but to start raising fees.
Under a new rule that went into effect Monday, borrowers will have to pay the insurance premium that is bundled with their mortgage payments for at least 11 years – and possibly for the entire duration of their mortgage, depending on the loan. Prior to this new rule, the insurance premium typically expired once 22% of the principal was paid.
"This is going to hit hard in low-income and middle-class neighborhoods," John Settles, a mortgage consultant with Wells Fargo, told the Washington Post.
The cash-strapped FHA may need a bailout totaling up to $1 billion before the end of the year, members of the House Committee on Oversight and Government Reform learned on Tuesday.
In addition the FHA – which has not required taxpayer support in its 79-year history – is being accused of hiding information contained in an audit conducted last fall showing that, should the housing market implode again, it could incur losses as high as $115 billion over a 30-year period.
The ‘stress test,’ which was apparently omitted from the government mortgage-insurance agency's independent actuarial review, shows that should there be another housing meltdown, its projected losses over 30 years would exceed its reserves by $13.5 billion.
The FHA is required to maintain enough cash to pay for projected losses on all loans it insures.