For example, FHA’s May 2015 Production Report indicates that there were 102,795 FHA loans endorsed in May 2015 and a total of 607,938 in Fiscal Year 2015 thru the end of May. By comparison, there were only 497,344 FHA loans endorsed in the same time period in Fiscal Year 2014.
The Department’s lowering of their annual MIP by 50 basis points for most loan transactions certainly contributed to this increase in business. Most noteworthy, however, was that purchase transactions accounted for 59% of the total number of loans insured in May 2015 – so, one cannot argue that FHA’s business increased solely to borrowers’ refinancing their current mortgages to take advantage of the lower annual premiums.
Conversely, the USDA has announced in June 2015 that their upfront guarantee fee on their Guaranteed Loan Program loans will increase from 2% of the loan amount to 2.75% of the loan amount beginning with loans obligated on and after October 1, 2015. Their annual fee of .50% will remain unchanged. No explanation was provided by the USDA in their announcement as to why such an increase in fees was deemed necessary.
On VA loan transactions – the VA Funding Fees have remained quite stable. The current fee structure was implemented in 2011 and is expected to remain the same through 2016. These fees vary according to the amount of down payment and military status of the borrower. For example, the VA Funding Fee for a $0 down payment loan transaction involving regular active Military personnel would be 2.15%. VA loan transactions continue to be very popular and their annual loan volume continues to increase each year.
The important role that government-backed loans play in the market cannot be underestimated. One only has to look at what happened in 2008 (or if you are much older, like me, the oil glut crisis in the early 1980s) when the mortgage market collapsed and government-backed loans rescued the mortgage lending industry.
In fact, prior to the collapse in 2008, I was the Director of the Processing & Underwriting Division in the Philadelphia HUD Homeownership Center. It was extremely difficult for me at that time to even get invited to trade shows and industry events (with the exception of MBA events, in which FHA was always welcome) in promoting FHA loans.
I was told that FHA loan transactions involved too much paperwork and a more thorough review of the property and lenders had better financing options available to them. The sub-prime mortgage business was booming! Many lenders at that time were originating no doc, low doc, and low down-payment loans with “stated” income (also known as “liar loans”). These loans were not necessarily the best rate/terms for prospective borrowers, but they were sure easy to originate, underwrite and close. Look what happened!
That being said; I think everyone agrees (even senior HUD management) that it is not a healthy situation when government-backed financing maintains a dominant share of the overall market. Fees for government-backed loans should remain reasonable and be reflective of the risks involved but not be cost prohibited.
In my opinion, the current fee structure for government-backed loans is appropriate and should not be changed going forward unless default/claims increase and pose a threat to the financial solvency of these programs.