The Federal Housing Administration (FHA) increased the annual mortgage insurance by 25 basis points for new mortgage loans starting April 18.
For 30-year mortgages, the annual premium goes up to 110 basis points from 85 basis points (for LTVs <=95) and to 115 basis points from 90 basis points (for LTVs >95).
This premium increase results in a payment increase of $33 for a $163,000 sale price with 3.5% down payment, according to Bank of America Merrill Lynch analysts.
They added that the effect will be felt in a couple of ways. The first, they said, is that this rule change should cause a drop in speeds from the increased costs. The effect will be the most for cuspy coupons or 4.5s and 5s. Speeds for 4.5s they think can decrease by 1-2 CPR and 5s could drop by 2 to 3 CPR as a result of the 25 basis point increase in annual MI.
Secondly, the market, BofA Merrill analysts said, might experience a temporary rise in applications becuase of this rule change. This would also result in increased speeds for March and April as borrowers rush to process loans to avoid higher costs.
Applications jumped by around 50,000 itn the August to September 2010 period when MI rose from 50 basis points to 55basis points to 85 basis points to 90 basis points.
"However, we expect this jump to be much less now given the sharp rise in mortgage rates since last November," analysts wrote.