President Barack Obama today announced the changes to the Federal Housing Administration (FHA) streamlined refinancings.
Under the brand new program, borrowers whose loans were originated prior to June 1, 2009 will pay an annual mortgage insurance premium (MIP) of just 55 basis point after refinancing, which is only half of the current rate of 110 basis points. The upfront MIP, which will soon be 175 basis points for all other borrowers, will be set at only one basis point for these borrowers.
The FHA also released its Mortgagee Letter today that described upcoming mortgage MIP changes. Credit Suisse analysts, in a note released this afternoon, outlined the key elements of this release.
These include the annual MIP will be higher by 10 basis points (to 120 basis points - 125 basis points) on loans up to 625k. It will also increase by 35 basis points (to 145 basis points to 150 basis points) for loans more than k625. This will apply to case numbers assigned after April 9, 2012. Credit Suisse analysts think that this should affect speeds beginning in May/June, using a six- to seven-week lag from application to closing.
Meanwhile, the upfront MIP will be higher by 75 basis points to 1.75% on the same effective date as above.
Included in the changes are that all purchase and refinance transactions such as those from FHA to FHA will be impacted by these changes. But, as noted below, these changes will not apply to existing FHA loans with a May 31, 2009 endorsement date or earlier for streamline refinance transactions.
For streamline refinance transactions for loans that are endorsed by FHA on or before May 31, 2009, the annual MIP that will apply will be 55 basis points and upfront MIP will be lowered to a basis point. The endorsement usually happens three to four weeks after closing, which suggests that April 2009 and earlier origination will qualify). These changes are effective June 11, 2012.
The new steps announced by the President earlier today offer housing relief to FHA borrowers, Credit Suisse analysts said, which targets about 2.3 million borrowers. Analysts projected that up to 100K incremental borrowers can ideally refinance under these improved terms in the next two years.
Analysts noted that FHA voluntary speeds dropped significantly in 1Q10 (prior to MIP increases) as a result of changes to the FHA streamline refinance program announced in late 2009 in Mortgagee Letter 09-32.
The appraisal requirement if a borrower chooses to roll in closing costs, analysts said, was the key hindrance.
This, together with an overall 97.75% LTV cap on the loan amount, comprised most of the borrowers who would need cash for closing. The resulting inability of borrowers, who were mostly cash constrained, to fund closing costs resulted in a much weaker refinancing response or a flatter GNMA S-curve in 1Q10 across all incentive levels.
The prepay effect from higher MIPs since October 2010 was only incremental since most of these eligible borrowers from May 2009 and earlier were already deep in-the-money, analysts explained. They said that the current average gross note rate for the 2.3 million universe of qualifying 30-year, fixed-rate FHA homeowners go over 6%, which suggests that these borrowers have over 200 basis points of refinance incentive on average. Thus the incremental incentive from today's announcement should only have a marginal effect on prepays, Credit Suisse analysts said.