The Impact of Changes to FHA Mortgages

Over the past several years, FHA (Federal Housing Administration) has had a very active role in the mortgage industry as it has become a major source of mortgage lending for low to middle income consumers and first time home buyers. After a temporary decrease in loan limits, it once again made its mortgage programs available to higher earning individuals with the reinstatement of the FHA loan limit to $729,750. Since that time, guidelines and fees have been updated making it a little more difficult to qualify for a FHA mortgage. The impact of current changes to FHA mortgages will not be known until its next market share numbers are released in the near future.

Prior to the housing collapse in 2008, FHA mortgages covered only 10 to 15 percent of market activity. Today, that share has increased to approximately 30 percent and has been as high as 47 percent. As sub-prime mortgages disappeared, FHA became the popular mortgage program for that portion of the mortgage industry. For FHA, this added business amounted to an over abundance of risk which can threaten its stability. In order to strengthen the FHA insurance fund, the upfront mortgage insurance premium on all FHA mortgages has now been increased to 1.75 percent. The FHA annual mortgage insurance premium for all mortgages has been raised by .10 percent to cover the temporary payroll tax cut (yes, completely unrelated legislation). In June, the annual insurance premium increases another .25 percent (total .35%) for mortgages above $625,500. While these increases may seem to be small, they will ultimately affect a borrower's debt-to-income ratios. As a result, there is a loss of purchasing power for the future home buyer when choosing a home. In other cases, some borrowers may no longer be able to purchase a home at all if the resulting ratios are not acceptable. When looking at these costs for the higher loan amounts, it seems obvious that many borrowers with good qualifications will turn back to traditional jumbo mortgages in order to avoid these added fees.

Back in February, 2011, the HUDDOC titled "Reforming America's Housing Finance Market, A Report to Congress", states "As Fannie Mae and Freddie Mac's presence in the market shrinks, the Administration will coordinate program changes at FHA to ensure that the private market -- not FHA -- picks up that new market share". Although part of this was to reduce the FHA loan limit back to normal (about half of the $729k limit), which subsequently was reversed, the impact of the above fee changes to FHA mortgages may very well reduce its market share to a level more in line with what the government initially had in mind.

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