Dennis' Mortgage Blog

Question of the week:  Will the increase in the mortgage insurance by FHA affect my loan?

Answer:  Not if you are already in process and your FHA mortgage application has been assigned a case number, and not if your FHA mortgage application is in process and receives a case number prior to April 18, 2011.

If you are planning on FHA financing for the purchase of your new home, or have an FHA mortgage and are eligible for a Streamline Refinance after April 18, 2011, then you will be impacted by an increase of 0.25% in the monthly mortgage insurance premium (MIP).  The upfront mortgage insurance premium (UMIP) will remain the same at 1.00% of the loan amount.

After April 18^th if your loan to value is greater than 95% your MIP will be1.15% of your mortgage amount, if your loan to value is 95% or lower your MIP will be 1.10% of your loan amount.

For a $300,000 FHA mortgage the 0.25% increase means $62.50 more per month in MIP payment than those FHA mortgages taken prior to April 18, 2011. 

If you make $72,000 per year this increase in MIP means your debt-to-income qualifying ration will increase by 1%, for those stretching their qualifying to the maximum FHA limits that 1% may mean you need to fund a smaller mortgage, or look for another home.  At current FHA rates $62.50 translates to approximately $12,500 in mortgage amount.

Why is FHA raising the MIP?  To increase revenue by an estimated $2.5 to $3 billion annually.  This increase in revenue is necessary so FHA can meet the 2% reserve requirements for FHA mandated by Congress.

Unlike Fannie Mae and Freddie Mac which purchase mortgages from lenders, and then sell them on the secondary markets as Mortgage Backed Securities, and have each lost billions of dollars the last few years (combined they owe the U.S. Treasury over $165 billion), FHA does not buy or sell mortgages but rather insures them.  The UMIP and MIP premiums paid by FHA borrowers go into the insurance pool that reimburses lenders and investors on FHA mortgage losses.

Since 2008 the mortgage insurance premiums for maximum loan to value FHA mortgages have gone from 1.5% to 1.00% for the upfront mortgage insurance premium and from 0.55% to 1.15% for the monthly mortgage insurance premium effective April 18, 2011. 

For a $300,000 mortgage at today’s rates the monthly principal, interest and mortgage insurance payment will increase about 8.5% from 2008 with the new MIP rate, from $1660 per month to $1800 per month.  Or if you qualified for a $300,000 mortgage in 2008 with a $1660 per month payment, today that $1660 per month payment qualifies you for a $270,000 mortgage. 

The increase in mortgage insurance premium will further reduce the pool of qualified borrowers for FHA mortgages; but will also increase the solvency of the FHA mortgage program ensuring future homeowners will have access to FHA financing.

Have a question for me?  Ask me!

Without any market moving news this week Mortgage Backed Securities (MBS) and bonds took most of their cues from the stock markets and foreign events.  On Wednesday the Treasury auctioned off 10 year notes and investors were buying, this pushed MBS up after a day and a half of selling.

Resistance has kept a floor on rates.  Quick refresher for long time readers of the Weekly Rate & Market Update and quick lesson for new comers on price support and resistance.  All investments have a trading range between a top price and a low price.  Determined by the market a stock, say Dennis Corp, will trade for several days, perhaps even weeks between a high of $15 per share and a low or $13.50 per share.  The range is defined by bounces off the top price, known as resistance, and the bottom price, known as support.  If the price breaks through either the resistance or support and can stay there for a day or two then a new trading range will be established either higher or lower depending on which barrier was broken.  In this example if the resistance was broken and Dennis Corp starts trading at $15.50 per share then a new range should develop perhaps between $14.25 and $16.00.

Mortgage Backed Securities are no different.  They are an investment with a price, the higher the price on MBS the lower mortgage rates.  For the past ten days Fannie Mae MBS have been testing the 102.00 price level as a point of resistance.  Several times MBS prices have risen to 102.00, or even broken through, and then receded back below the 102.00 price level.  Overall this has been good for mortgage rates as it has raised the trading range on price, and lowered the yield—i.e. mortgage rates.

Yesterday Fannie Mae MBS closed above the 102.00 resistance level.  This raises a strong possibility that a new higher trading range will develop for MBS, and a new lower range for interest rates.  This morning the market opened below the 102.00 level, rallied above the mark and has since dropped back down.

If MBS can pierce the resistance level again at closing we may see a slow march down in rates over the next week.  If MBS close below the 102.00 resistance mark there is a great possibility that the current mini-rally is over. 

Japan’s massive earthquake and tsunami will have a long term impact on financial markets.   The disaster has already had a positive impact on the U.S. stock markets as energy, materials and industrial companies have seen their stocks rise on expectations that demand for products and services will increase to rebuild the damage.  On a negative economic note, Japan’s economy has been struggling, some have defined it as fragile, and the devastation of yesterday’s geological events could push the nation into a deep depression.  Should that happen other countries in the region, and throughout the world, could be very negatively affect.

Our thoughts and prayers to the people of Japan.  I know our country and others will be providing significant resources and support to assist the Japanese in the aftermath of the disaster.  Already the Red Cross has established a Japan Earthquake and Pacific Tsunami site for donations.  Watching the indescribable video of the tsunami wiping out buildings and towns leaves one speechless, and I hope more inclined to donate even $10 to the Red Cross for the work we know it will do to help in recovery.

Rates for Friday March 11, 2011 Rates have dropped from last Friday on FHA mortgages and have remained the same for conforming.  The pressure is there for lower rates, but thus far no significant momentum  has been able to develop.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year confroming                               4.75%               No change

30 year high-balance conforming           4.875%             No change

30 year FHA                                         4.375%             Down 0.125%

30 year FHA jumbo                              4.625%             Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

*Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Don’t forget to set your clocks forward an hour tomorrow, unless you are looking for an excuse to be an hour late!

Here again is the site to donate to the Red Cross.

Have a great week,

Dennis