Thursday, February 12, 2015
Getting a mortgage for less
Julian Castro, the current Sec for the US Dept of HUD, testified before the Committee on Financial Services on Wednesday, February 11, 2015 regarding the reduction of the Mortgage Insurance Premium
Before your eyes glaze -this is important. A reduction in the premium has huge benefit to everyday people buying a home and financing it with an FHA loan. About 5-years ago, HUD raised that premium and that cost borrowers a significantly higher amount to close their loans - money out of their pocket to HUD. And, each month, their monthly payment included hefty monthly premiums that went to HUD.
Castro is seeking to reduce this amount for two reason. 1. The high premium is forcing borrowers to look at big banks offering 3% down payment mortgages with lower insurance. 2. By reducing the premium and by offering a truce with banks who refuse to do FHA loans (by not forcing them to buy back FHA loans for immaterial defects), Castro is hoping that more people will apply for and get an FHA loan.
This is important to HUD and frankly to the US. First, HUD has seen a large drop in FHA loans for the reasons cited above. Consumers don't want to pay and banks don't trust FHA to punt loans back to them for small defects that don't affect the material soundness and quality of underwriting a borrower.
But, FHA loans provide borrowers who can't get a 3% down loan at a bank with the ability to get a mortgage. Those much talked about low down payment loans at major banks and bankers come with tougher credit, employment and asset requirements than an FHA loan
Since the 1930's FHA has played an important role in housing - providing loans to people who otherwise would not get one. So, HUD is an important player in the US economy.
The US Congress cares about this reduction because not so long ago FHA and HUD ran out of money as the foreclosures went through the roof. Castro stated that in response to this HUD increased the insurance amount from borrowers and toughened underwriting which brought in a 21 billion improvement to the insurance fund.
HUD remains under the limit required to have in reserve - a violation that a regulatory like HUD would not tolerate in a lender. Congresspersons grilled HUD about this very fact in light of the reduction of the insurance premium, which goes to increase their reserves.