August 19, 2017

FHA Mortgage Insurance Increase Tied To Payroll Tax Cut Is Bad News For Homeowners

The attempt by legislators to extend the payroll tax reduction has resulted in proposals to increase the mortgage insurance premiums on FHA loans.

Originally, the Senate had only proposed increasing the guarantee fees charged by Fannie Mae and Freddie Mac on sales of mortgage backed securities.  The estimated fee increase of 12.5 basis points would have been passed on to mortgage borrowers, theoretically putting conforming mortgages with private mortgage insurance at a competitive price disadvantage to FHA mortgages.

In response to lobbying efforts from the private mortgage insurers, the Senate agreed to also increase the mortgage premiums on FHA mortgages to avoid giving FHA financing a competitive advantage.

The attempt by Congress to increase fees on all mortgages was the result of an attempt to offset the cost of extending the payroll tax.  By hiking fees on new mortgage borrowers, the cost of the payroll tax reduction is merely being shifted from one taxpayer to another, in this case, the homeowner.  The attempt to increase fees to mortgage borrowers at a time of declining home prices, higher property taxes and lower incomes seems to be particularly ill conceived and destructive to a future restoration of health in the housing industry.

Politically, however,  it is easy to understand why Congress would decide to offset the cost of the payroll tax reduction with increased mortgage fees.  The mortgage fees will not directly tax anyone that already has a mortgage so there is no existing group of tax payers that will be immediately affected today by the hike in mortgage fees.  Congress, already facing massive public disgust and disapproval, did not want to risk angering taxpayers with a direct and immediate tax hike.   However, the higher mortgage fees will apply to all future borrowers who purchase or refinance.  At a time when the cost of obtaining a mortgage is already very expensive, additional costs will only discourage future refinances and purchases.

FHA premiums are already extremely expensive.   Borrowers pay an upfront mortgage insurance premium of 1.0% in addition to the yearly premium that can be as high as 115 basis points (1.15% per year).   On a $250,000 mortgage, an increase of 12.5 basis points in the annual premium would increase the annual cost by $312.50 to a total of $3,187.50.