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In the coming months, banks, mortgage lenders, consumer advocates and policy wonks will be slicing and dicing the latest Home Mortgage Disclosure Act data, as they do every year. Rarely, if ever, have the stakes been higher.
September 24
A high percentage of Federal Housing Administration-insured loans are falling into the "higher priced" bucket due to a series of mortgage insurance hikes over the past several years.
A new Home Mortgage Disclosure Act report, released by the Federal Reserve Board, said that 40% of FHA loans originated after May 2013 had an interest rate 1.5 percentage points above the prime offer rate.
Such higher-priced loans are generally considered riskier. For example, in the Dodd-Frank Act, non-FHA loans with such a rate jump are subject to special appraisal requirements to ensure the price of the house has not been inflated.
FHA loans have become more expensive due to efforts to recapitalize the FHA mortgage fund, which suffered heavy losses on defaulted loans as a result of the housing bust and economic recession. Last September, FHA needed a $1.7 billion draw from the U.S. Treasury Department to shore up its finances. FHA currently charges borrowers an upfront fee of 175 basis points and an annual premium of 135 bps, the highest premiums in the agency's 80-year history.
The Fed report, which analyzes HMDA data collected by regulators, said pricing of FHA loans "spiked" after the mortgage insurance agency made its 135-bp annual insurance premium permanent. Borrowers who took out FHA-insured loan since May 2013 have to pay the annual premium over the life of the loan, which raises the annual percentage rate and makes the loan more expensive. (Previously, the annual premium would be canceled once an outstanding loan balance had reached a 78% loan-to-value ratio.)
"These changes appear to have pushed many FHA home purchase loans just over" the higher-priced threshold, according to the HMDA report, which was released Monday. "Over 75% of higher priced FHA home purchase loans were within 0.5% of the higher-priced threshold."
The FHA annual actuarial report slated to be released in November is expected to show that the health of the FHA insurance fund has improved. Some are hoping the actuarial report, which is prepared by independent auditors, will give FHA the green light to restructure or lower its premiums.
Meanwhile, the vast majority of FHA-insured loans continue to enjoy a "safe harbor" from litigation under FHA's qualified mortgage rule, despite the high premiums. But a small percentage of FHA loans may fall into the "rebuttable presumption" category due to the high premiums, according to sources.
The safe harbor is intended to shield lenders from litigation risk under the QM rule. The rebuttable presumption assigned to higher priced loans means there is a greater level of litigation risk when a borrower defaults.
