For years, FHA has allowed existing homeowners with FHA insured loans to refinance to new rates without an appraisal. Similar to HARP, FHA streamline refinances have traditionally allowed homeowners to take advantage of lower rates with relaxed guidelines on home value. Without any new stimulus bills, speeches from the president, or elaborate media buzz, FHA streamline refinances have been helping millions of homeowners qualify for lower rates.
Unfortunately, some recent changes to the FHA guidelines have eliminated many homeowners from qualifying for a lower rate refinance. With politicians spending countless hours improving upon HARP, how could this key group of homeowners have been forgotten?
In 2006, FHA represented less than 4% of all home purchase loans. By 2010, FHA was being used for almost 20% of all purchases. This sudden spike in FHA loan origination instigated a series of changes to the program that included higher costs in the form of expensive mortgage insurance. This was a necessary change to help the funding of FHA loans.
The higher costs for newly originated loans are probably justified, but existing FHA borrowers refinancing to take advantage of new low rates are in for an unfortunate surprise. Here’s an example: if a homeowner had a $200,000 5% FHA 30-year fixed originated in 2009, they would have a payment of $1,165.31 with FHA mortgage insurance (a mortgage insurance rate of .55% annually at the time). If the same homeowner applied for an FHA streamline refinance in 2011 at 4%, their payment would only reduce to $1,146.50 (the current FHA mortgage insurance rate is 1.15%). Is it reasonable to spend thousands of dollars in closing costs to save less than $20 per month? Probably not.
One other interesting thing is that FHA is losing revenue by operating this way. FHA charges an upfront fee called an Upfront Mortgage Insurance Premium. On a streamline refinance the fee is reduced, but represents real income for FHA. Ultimately, millions of homeowners are not participating in the program, and are unnecessarily paying higher rates.
In my mind the solution is simple. While it may be necessary for FHA to increase its costs, there is no real reason to charge more to existing homeowners with FHA loans. If FHA allows existing homeowners to keep their current monthly mortgage insurance costs, a homeowner can lower their rate and payment similarly to HARP. FHA can charge the homeowner a new upfront cost which most homeowners are happy to pay to benefit from a lower rate.
A colleague I spoke with indicated that FHA streamline refinances have a higher rate of default, which may be the reason FHA is imposing the higher costs. I can believe that this is true, and it is probably related to the loose FHA streamline guidelines. For example, they is no appraisal requirement, nor is there a debt-to-income ratio standard. (Note: Debt-to-income ratio is a calculation lenders use to identify whether a homeowner can afford a given monthly payment).
It is not clear to me why the FHA cannot change the guidelines to require a debt-to-income ratio calculation. As it stands now, a lender will allow homeowners to refinance on a FHA streamline loan without checking to see if they can afford the payment. For example, a homeowner could have a pay cut immediately after becoming over-extended with credit card debt. Under current FHA guidelines, this homeowner would qualify for an FHA streamline refinance. We can easily imagine how helpful a reduced payment could be for the homeowner, but clearly this is not the intent of the program. I would argue that the program could have a much larger impact were it to focus on the earlier group I spoke about.
One out of every six homes purchased since 2009 was closed using an FHA loan. Since 2009, values have declined further and many of the homeowners who purchased are now underwater without any refinance options to lower their payment. Spending time to improve HARP is a great thing, but there are millions of folks with FHA loans in the predicament described above. I talk with approximately one per day. If the government is serious about helping homeowners refinance their underwater mortgages, it’s time they undo the price hikes on FHA streamline refinances.
Hats off to FHA for recognizing this problem. The first step in fixing the problem has been implemented. All FHA homeowners who received their FHA loan prior to May 31st, 2009 can refinance on a new FHA loan with reduced mortgage insurance premiums.
The upfront cost for these refinances will be a miniscule .1% and the annual premium of .55%. This matches the annual mortgage insurance cost for loans originated prior to October of 2010.
For homeowners who didn’t take advantage of refinancing since 2009, this is great news. There are still a large group of homeowners who bought after May 31st, 2009 who need help, but I understand the need to service a portion of homeowners now and evaluate the success before opening the flood gates to everyone else. Hopefully in time they’ll move this date to loan originated prior to October 2010. All homeowners who bought with an FHA loan prior to October 2010 received a .55% annual premium, meaning the homeowners who took an FHA loan after May 2009 but before October 2010 would still be asked to take a higher mortgage insurance premium if they did a FHA streamline refinance.
Here’s a link to the announcement: