On April 9th, the FHA made another round of changes to the mortgage insurance premiums that it charges. The FHA has increased its premiums as a means of shoring up its books in light of high delinquency and foreclosure rates on legacy lending programs. While the increases to the MIPs are small on their face, combined with the recent expiration of the deduction on mortgage insurance, they add up to not-so-small amounts.
The FHA increased its upfront mortgage insurance premium (UFMIP) from 1.0% to 1.75%, while the annual premium was increased from 1.15% to 1.25% for borrowers putting less than 5% down and from 1.1% to 1.2% for borrowers putting more than 5% down. On a $200,000 30-year fixed rate mortgage at 4% with less than 5% down, the change to the MIP would increase the monthly payment from $1,147 to $1,163 or by $17. The increase in the upfront mortgage insurance premium would also impact the monthly payment as the FHA allows the UFMIP to be financed; the most likely option for borrowers utilizing a low downpayment product. The increase in UFMIP from 1.0% to 1.75% raises the monthly payment when financed by $7, for a total of $24. The increases in monthly payments due to the new UFMIP and MIPs are charted below.
However, the recent increase in the MIP is only one factor faced by prospective home buyers. Since January, buyers whose adjusted gross income is less than $109,000 can no longer deduct mortgage insurance. To quantify the effects of the lost deduction separate from the new, higher premiums, we quantify the impact of the lost deduction on loans at various price levels with the old MIPs. The impact of the lost deduction for mortgage insurance is charted above. For a $200,000 fixed rate mortgage at 4%, the lost deduction of the MIP of 1.15% and UFMIP of 1.0% effectively increase the monthly payment by $54 assuming a family in the 25% tax bracket. Thus, the total impact of the elimination of the mortgage insurance deduction and the new, higher MIPs and UFMIPs is to increase a borrowers’ monthly payment by roughly $78 or 6.7% relative to the same loan originated in December of 2011, which totals to roughly $932 per year. On a $400,000 loan, the effective increase is $155 monthly and nearly $1,865 per year. The impact declines thereafter because individuals or families who could afford mortgages above $400,000 likely would not have qualified for the deduction on mortgage interest. As noted in another piece on this site, FHA Should Expand the Opportunity, these changes can also erode much of the benefit to a potential refinance for a homeowner who originally purchased in late 2009 or 2010, when MIPs were much lower.
The steps that the FHA is taking to shore up its balance sheet are necessary and prudent. However, the costs to the consumer are significant. What’s more, raising the cost of FHA’s programs in hopes of reducing its foot print in the secondary market will hurt consumers if the private sector is not ready to expand lending in the low downpayment arena.
 Note that the payment on a loan of roughly $400,000 is unsustainable for a family with an income of $109,000, the max adjusted gross income eligible for the deduction. Consequently, there is no impact from that point upward of the lost deduction.