President Obama has been making news recently in the housing industry. He has made comments on making FHA Streamline Refinances more accessible, and Wednesday morning the White House released some details on the President’s latest refinance plan. Minimum credit score of 580, and loan to value ratio (loan amount compared to the homes value) of up to 140%. The catch is that the homeowner must be current on the existing loan.
Good news, right?
I am all for helping homeowners and at the same time trying to help turn around the housing crisis. At some point in time the politicians in Washington need to sit down and actually think through the plan before moving forward on it.
First, FHA Streamlines have become obsolete since September 1, 2010 when FHA raised their Monthly Mortgage Insurance Premiums (PMI), and did so again on February 14, 2011. FHA requires a net tangible benefit to the borrower, and one of the requirements to document benefit is reducing their monthly payment by at least 5%. So let’s take a look at a real world example:
Homeowner took out a $125,000 FHA 30 Year Fixed at 6% in 2009. Their payment (principal and interest plus mortgage insurance premium) was broken down as:
$762.55 Principal & Interest
$57.29 Mortgage Insurance Premium
$819.84 monthly payment
Now, they would like to do a Streamline Refinance, using round figures, the homeowner would owe roughly $122,000 on his mortgage, so using that as the new loan amount, and an FHA 30 Year Fixed Rate at 4%, the payment would be broken down as:
$607.21 Principal & Interest
$114.58 Mortgage Insurance Premium
$721.79 Monthly Payment
The homeowner dropped their interest rate by 2 full percentage points, yet is saving less than $100 per month. And on top of that his Mortgage Insurance Premium clock starts ticking again, as FHA requires you to pay Mortgage Insurance for a minimum of 5 years. Also, lower credit scores will increase the interest rate, so that $98.05 per month savings would drop considerably for homeowners with credit scores under a 660.
Now, lets take a look at the proposal to help homeowners with scores down to a 580 and loan to value ratios up to 140%. Obviously lower credit scores and higher loan to values equal MORE RISK. When a bank is presented with more risk, the price goes up. The White House estimates that $5 billion to $10 billion will be needed to fund the new program. Where is that money going to come from? A new tax on banks called the “Financial Crisis Responsibility Fee”.
So banks will incur a new tax, and be asked to make riskier loans. The cost will be passed along to homeowners through higher interest rates and higher costs. There is no way around it.
Recently the government passed the Payroll Tax Cut Extension, and it was funded by an increase to a fee that Fannie Mae and Freddie Mac pay. Shortly thereafter, lenders began issuing memos specifically stating that their rates would be getting worse due to this fee.
Will the effects of the “Financial Crisis Responsibility Fee” tax be any different?
Is this all political jockeying since it is an election year?
