President Obama unveiled yet another housing-related policy at a news conference yesterday that dramatically lowers interest rates for two to three million refinancing homeowners with Federal Housing Administration (FHA) mortgages.
The policy would modify the FHA’s “Streamline” refinancing option that does not require many of the protocol documentation of a normal FHA refinancing, such as income verification, employment history, credit checks and even appraisals, which excludes many underwater borrowers from standard refinancings.
The key modification, as reported by The Wall Street Journal‘s Nick Timiraos, would be the changes the new policy would make to the interest rates on all Streamline refinancings for loans made before June 1, 2009.
“[M]any borrowers who took out FHA-backed loans several years ago haven’t been able to do a streamline refinance because FHA insurance premiums have increased sharply over the last two years,” Timiraos wrote. “As a result, while interest rates have dropped to a level that would normally spur lots of refinancing, the higher FHA premiums have offset those savings and many borrowers haven’t taken advantage.”
In response to that, the FHA will decrease its upfront insurance premiums from 1 percent to 0.01 percent, and its annual premiums from 1.15 percent to 0.55 percent, a savings, the administration says, of about $1,000 a year.
The plan would not require congressional approval, but to qualify for the rates, borrowers must have made all of their last 12 payments.
The timeline for the qualifying mortgages, though, is giving some analysts pause. The White House has stated that between two and three million borrowers would have access to the financing, but according to Credit Suisse numbers that Timiraos cites, roughly two-thirds of the FHA’s 30-year mortgages were originated post-June 1, 2009. Though many of those loans have taken advantage of the historically low mortgage rates of the last two years, of the FHA mortgages that have rates in excess of 5 percent, around half would not qualify for the new policy.
UPDATE: From a Calculated Risk post on the measure: “Lenders were limited to refinancing only when a ‘benefit to borrower’ existed. It was a pretty high wall to climb to make deals work. For example, a person with a 4.5% loan couldn’t refinance to 3.75% because the Mortgage Insurance was going to more than double. Now, with a .55 Mortgage Insurance limit, the refinance deals will really start to explode.”