FHA Mortgage Insurance Premiums May Benefit From HUD Note Sale

December 10, 2012 - 2 min read

HUD to sell 15k notes in 2013; FHA MIP may benefitThe U.S. Department of Housing and Urban Development (HUD) has announced plans to sell as many as 40,000 distressed homes via its Distressed Asset Stabilization Program (DASP) in the next 12 months.

A “distressed home” is one which can be categorized as a short sale or foreclosure.

The move will accomplish two important objectives for HUD. First, it will provide direct support to U.S. communities hardest hit by last decade’s housing market downturn.

Second, it will reduce the total claims cost to the FHA’s Mutual Mortgage Insurance (MMI) fund, which will help to raise the agency’s total reserve ratio back near congressionally-mandated levels.

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$1 Billion Economic Benefit To FHA

In September 2012, the Federal Housing Administration sold more than five thousand non-performing mortgage notes and more than four thousand notes from areas deemed “hard-hit” by the FHA.

The sale yielded an estimated $1 billion economic benefit to the FHA’s MMI fund and is the model for future mortgage note sales.

As part of its Distressed Asset Stabilization Program for 2013, HUD will continue to sell non-performing notes from all 50 states, and, with each quarterly sale, its Neighborhood Stabilization Outcome (NSO) loan pools from will focus on different metropolitan areas in need.

The first sale, for example, slated for the first quarter of 2013, will include an NSO pool from Florida, Georgia, Ohio and California.

HUD plans to sell up to 15,000 mortgage notes at the auction.

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Alternatives To Raising FHA Mortgage Insurance Premiums

HUD’s move to sell delinquent mortgages and loans in hard-hit areas may ultimately lower loan costs for home buyers using FHA financing and existing FHA homeowners using the FHA Streamline Refinance program — especially if future Distressed Asset Stabilization Program (DASP) sales generate comparable, billion-dollar benefits to the FHA’s Mutual Mortgage Insurance fund.

The math is basic.

According to its most recent audit, the FHA’s reserve balance is -1.44% which means that for every $100 insured by the FHA, it has -$1.44 in its “bank account”.

By law, the FHA is required to maintain a 2% reserve balance.

The FHA has witnessed its reserves dwindle since last decade so, beginning in 2008, it started to raise money from its FHA-insured homeowners. Between 2008-2012, the FHA raised its mortgage insurance premium (MIP) five separate times. FHA-insured homeowners used to pay 0.5 percent annually for FHA mortgage insurance, for example. Today, they pay up to 1.5 percent.

On a mortgage at the of $729,750, that’s $608 extra monthly.

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The Distressed Asset Stabilization Program (DASP) program offers the FHA an opportunity to rebuild its reserves with minimal change to MIP. In the long-run, this can yield lower loan costs and lower monthly payments for FHA home buyers and existing FHA homeowners.

It’s a plus for the housing market, in general, too. 46% of first-time home buyers use FHA financing.

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Dan Green
Authored By: Dan Green
The Mortgage Reports contributor
Dan Green is an expert on topics of money and mortgage. With over 15 years writing for a consumer audience on personal finance topics, Dan has been featured in The Washington Post, MarketWatch, Bloomberg, and others.