As many of you were aware the UFMIP/MMI changes were being moved from 2.25%/.55% down to 1% up to .90% respectively. At first glance the lower cost to participate in the FHA program looks great!  

Borrowers don't have to finance an additional 1.25% of their loan (or try to get this covered by the closing cost credits). But on further inspection we see that the .45% increase in MMI actually makes it marginally harder for home buyers to income qualify for an FHA home loan. Of course there is a Silver Lining: since HUD is lowering the allowable seller credit from 6% to 3% (to match FNMA/FHLMC) this would make it easier to have the seller pay at least the UFMIP.

Overall this is an interesting tact for an agency that is by all accounts hard pressed for funds and has seen its reserve account drop well below the legislated minimum. Why would HUD want to further restrict buyers (on top of all of the inane investor overlays already present)? I mean, for the last 10 months the government was throwing away $8k per transaction just to get people into homes. Now they're going to raise the bar on the buyer?

I'm starting to scratch my head over here on why this change makes any sense? Perhaps with home prices being depressed for a significant period of time and even 96.5% buyers likely underwater on a national level for at least the next 3-5 years they are hoping to lock in the MMI premiums for a longer period adding to their reserve account over time in a more consistent and predictable manner?

If you like you can play with the number s but at last review, while an FHA borrower is only required to pay for the minimum of 5 years and it's all about loan balance. The pay down period from 96.5% of purchase price to 78% of purchase price will take at least 10 if not 14 years on higher balances.

With rates expected to rise further north (as our government extracts excess funds out of the system to slow deflation) in the coming years and continued depressed home prices on going perhaps there's some logic to this?

Interestingly, I was reading over at Calculatedrisk.com on interview excerpt from a CNN interview with Secretary Donovan that read: (link)

" Secretary Donovan noted that the July plunge in home sales following the end of the federal home buyer tax credit was much sharper than the administration expected; that the administration was "very concerned," and would "do everything we can" to stabilize the shaky housing market. While he said that "it's too early to say after one month of numbers whether the tax credit will be revived or not," he also said that "we're going to be focused like a laser on where the housing market is moving going forward, and we are going to go everywhere we can to make sure this market stabilizes and recovers."

? excuse me? So, on the one hand you go and raise the overall cost to maintain participation in the program yet on the other you talk about tossing possibly more  of useless tax $$ after the housing market ?

Please figure out a methodology and stick with it!

Some numbers on a $250,000 home purchase in my market at the current and proposed Levels of UFMIP show the increased costs:  assuming a market rate of 5% (for arguments sake)

Current Payment:                             Payment for Case #'s as 10-4-10:

Base Loan Amount:  $ 241,250.00       Base Loan Amount:$  241,250.00

UFMIP @ 2.25%:     $     5,428.13      UFMIP @ 1.00%:  $      2,412.50

Total Loan Amount: $  246,678.13      Total Loan Amount: $243,662.50

Payment @ 5% =    $     1,324.22      Payment @ 5% =  $     1308.03

Monthly MIP .50%   $       157.51      Monthly MIP .90%   $        257.75

Taxes:                    $     260.46      Taxes:                  $        260.46

Insurance:                 $     70.36      Insurance:            $          70.36

Total Payment:         $    1812.51     Total Payment:      $       1896.56

Payment increase :  4.64%

Also of Note: HUD made changes to the Max CLTV on Friday per ML10-29 (nothing like announcements prior to a long weekend right?).  

Going forward the unlimited CLTV allowance on traditional FHA loans (Purchase, Regular Rate/Term and Cash out Refinance) has been removed. CLTV's are now capped at the program maximum of 96.5%/97.75%/85% respectively.

My Company had implemented these policies years ago so now it appears that HUD/FHA is taking on some of the guidance required by many investors in the secondary market already.  Reverse engineered Loan quality has always worked wonders, right? RIGHT? Face-palm!

The Minimum score to obtain a maximum financed FHA loan today is 580 (this is an update from down to 400). We all know that the market bar has been re-set to either 620 or 630 depending on the investor.

If I were a loan originator in this environment I would derive more value and customer loyalty by guiding my borrower into a higher credit score and savings history than getting them a loan with a lower fico just because they (the borrower) was asking for it.

I know many of your work tirelessly with your customers on this exact process and I certainly hope you are able to leverage all of that up front work for additional referral business. Even today it is not every loan officer that is willing to work a potential buyer into a better priced loan and product.