Breakdown of FHA's Multifaceted MIP Cut

The annual premium paid by borrowers on mortgages backed by the Federal Housing Administration (FHA) is going down by a quarter of a percent.  Housing and Urban Development (HUD) Secretary Julian Castro announced today that the annual mortgage insurance premium (MIP) will be reduced 25 basis points for most new mortgages with a closing date on or after January 27.  The reduction is expected to save new FHA insured homeowners an average of $500 this year.

A HUD press release said today's announcement reflects the fourth straight year that FHA's Mutual Mortgage Insurance Fund (MMIF) has strengthened.  It has gained $44 billion in value since 2012 and last year alone grew by $3.8 billion.  The fund now stands at 2.32 percent of all FHA insurance in force, the second consecutive year that it has exceeded the 2 percent capital reserve mandated by Congress.  The fund reached near insolvency during the housing crisis, prompting several increases in both the upfront premium and the annual one. 

Castro said FHA's action reflects today's risk environment and comes at the right time for consumers who are facing higher credit costs as mortgage interest rates are increasing.  "After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," he said.  "This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers." 

Ed Golding, Principal Deputy Assistant Secretary for HUD's Office of Housing added, "We've carefully weighed the risks associated with lower premiums with our historic mission to provide safe and sustainable mortgage financing to responsible homebuyers.  Homeownership is the way most middle class Americans build wealth and achieve financial security for themselves and their families.  This conservative reduction in our premium rates is an appropriate measure to support them on their path to the American dream."

While attempting to stabilize the MMIF FHA increased the annual premium by 150 percent starting in 2010.  Today's step restores the annual premium to close to its pre-housing-crisis level. 

The Mortgage Bankers Association (MBA) through its President David H. Stevens, commented on the FHA action, saying, in part, "The reduction in the premium is a result of our industry's and FHA's shared commitment to quality underwriting, and consumers will benefit as result. Reducing the cost of FHA loans benefits borrowers, but other changes to reduce uncertainty for lenders would be required to truly invigorate the FHA program."