On Friday, the U.S. Department of Housing and Urban Development (HUD) released its annual report to Congress on the financial conditions of the Federal Housing Administration (FHA)Mortgage Mutual Insurance (MMI) fund.
As part of its announcement, the HUD laid out a series of initiatives to improve the MMI fund's health without limiting access to credit for qualified borrowers. This includes increasing the FHA Mortgage Insurance Premium (MIP) for most homebuyers under the program who qualify for new loans.
According to Royal Bank of Scotland (RBS) analysts, this move to raise the premium should not become a considerable impediment to refinancing for most FHA borrowers since they can still apply for a mortgage.
The rise of 10 basis points in borrower-paid annual insurance premiums on new FHA loans should add roughly $13 per month for the average borrower in 2013.
RBS said that the impact on prepayments should be relatively slight since a $13 payment rise is affordable for most FHA homebuyers who qualify for new loans. Therefore, this should not serve as a considerable refinancing hurdle for most FHA borrowers.
According to RBS, the specific impact on borrowers would depend on their loan sizes. Those with larger mortgages should experience a bigger increase versus those with smaller loans.
A 10 basis point rise in the monthly mortgage insurance premium will probably slow prepayments for cuspy coupons, but the effect should be comparatively small. Prepayment models should also incorporate a small elbow shift to account for slower speeds, RBS analysts said.
Regardless of the firm's expectations that speeds will slow only slightly, analysts saw better buying in GNMA MBS after the MIP hikes were confirmed, specifically in 4.5s and higher.
GNMA/FNMA swaps have can rise further, analysts also said. They believe that the a 10 basis point rise was modest considering the dire state MMI fund is in. There could also be more increases to come from FHA. Any future MIP hike will be more favorable to higher coupon GNMA/FNMA swaps, RBS analysts said. But, they said that given the current environment, GSEs are also expected to raise fees in line with the private-label market pricing.