FHA faces dwindling insurance fund
December 08, 2011
According to Reuters, about one-third of all mortgage loans for home purchases are insured by the FHA, but an audit released November 15 showed that FHA insurance reserves had dropped to 0.24 percent. While the FHA reserve fund has already been below the legal minimum of two percent for three consecutive years, the latest figure marked a new low.
On December 1, Housing and Urban Development Secretary Shaun Donovan said before the House Financial Services Committee that further erosion of the FHA's portfolio could require the government to pad the agency's reserves.
Since January 2009 insurance premiums have been raised three times on FHA loans. Donovan said the FHA is considering raising insurance premiums again, but that further premium increases could affect the number of home buyers who qualify for an FHA loan, which could in turn worsen conditions in the housing market.
Donovan told Congress that any consideration of raising insurance premiums or making other changes to the FHA program must be looked at in "the context of balancing access to credit with the need to protect the fund," according to Reuters.
Bloomberg Businessweek reported that the independent audit indicated that the insurance fund's reserves have a 50 percent change of falling to zero, which could mean that taxpayer funds would be needed for financial support.
Mortgage rates and FHA loans
Conventional loans have similar mortgage rates to FHA loans, but the lowest mortgage rates for conventional loans are reserved for borrowers with the highest credit scores. Mortgage rates on FHA loans are not adjusted according to the borrowers' credit scores. However, FHA borrowers must pay mortgage insurance both upfront and monthly, which can add to the cost of the loan. Borrowers can use a mortgage calculator to estimate their payments with an FHA loan and a conventional loan.
Borrowers have frequently opted for FHA loans because of the low down payment requirement of 3.5 percent, as well as the ability to qualify for a mortgage loan with a lower credit score than that required for a conventional loan. Lenders are more lenient with FHA loan requirements because of the government insurance, which is paid by insurance premiums from borrowers.
Some have suggested the predominance of FHA-insured mortgages may be going away, in particular because borrowers with good credit and other qualifications such as a solid job history and a low debt-to-income ratio are finding more mortgage loan options, including some with a down payment of just 3-5 percent.
But whichever loan you choose, comparing interest rates is essential to determining which mortgage is right for you.
