On August 4th, the Senate passed HR 5981 and on the 11th of August President Obama signed the bill into law.  The bill gives the Federal Housing Authority (FHA), or more specifically the HUD secretary the flexibility to increase premiums associated with FHA loans.  The day after the senate passed HR 5981 the HUD secretary, David Stevens issued this memo, David Stevens Memo, effectively putting the FHA world on notice that if the President signed the bill into law, he signed it into law on the 11th of August, FHA would alter the premiums effective September 7, 2010. 

What this means is that the upfront mortgage insurance premium (UFMIP) will be decreasing rather dramatically, obviously decreasing the borrowers final loan amount by the 125 basis points (1.25%) that will no longer be added back into the loan amount, however the monthly payment will actually be going up for consumers as you can see in the graphic below that compares the old policy versus the new policy scheduled to be put into play on Sept. 7th.

You can see the loan balance is $2500 less to start with but the brunt of the payment shock will still be felt by the consumer as their payment will increase, by $45.10 per month on the example above.  This would translate to a loss of buying power based upon the basic guidelines of $8,900 on your sales price. 

HUD/FHA needed to make these changes to strengthen and stabalize FHA's single family programs, so it is very likely that these changes will solidify HUD.  The changes will likely decrease the demand for FHA loans more than the added funds that are needed to stabilize HUD that would have stabilized it's balance sheet.   Or, did they already take this into account?

Whatever the intended and consequent outcomes, at this time HUD Secretary Stevens did not publicize in his memo that he would be raising the net effects to both the UFMIP and Annual Premiums to the maximum amount that he could.  Hopefully this change will be all that is needed to restore the balance needed.  That being said, once balance is restored, will we see him reduce these premiums back to where they were in just a couple of years ago?

This decrease in purchasing power for buyers will cause changes in the market, but how much? 

As you've seen in the numbers above, will it cause housing prices in the FHA range to continue to decrease?  Alongside the new changes in FHA Mortgage insurance will we see a decrease in buyers purchasing power? This could lead to a decreasing supply of buyers which ultimately leads to decreasing sales prices of homes to meet with the available supply of buyers.  What do you think the net effect will be in that instance?

If HUD/FHA don't make the announced changes and they go defunct, it won't matter as the supply of buyers will drop more dramatically and could cause an even more serious destabilization of the housing industry.

I encourage you to email me your comments, ideas and viewpoints on how these changes may or may not stabilize FHA and the housing industry. 

Thanks

Rasty