Perhaps the current FHA requirement for mortgage insurance (MIP) for the life of most FHA loans could be a thing of the past, if Rep. Maxine Waters has her way. The California Democrat recently proposed a bill in the House of Representatives that would repeal the life of loan standard for FHA mortgage insurance. It would reinstate the past policy of requiring loan holders to pay until the principal balance is 78% of the original loan value. That is the standard currently for conventional loans.
FHA changed the policy in 2013 as an effort to improve the financial health of the Mutual Mortgage Insurance Fund that is the flagship fund for FHA. The Federal Housing Administration needed a nearly $2 billion bailout in 2013 because of a shortfall in that fund. Since that time, the fund has seen four straight years of growth and exceeded its mandated financial target set by Congress for the last two years.
Now that the MMI Fund is on better financial footing, Waters wants to eliminate the policy to keep mortgage insurance for the life of the loan.
Cutting this policy, which requires FHA mortgage holders to keep mortgage insurance for the entire loan life, is a big change that many in the housing and mortgage business have wanted for years. Waters stated that families that choose FHA financing should not be required to have expensive mortgage premiums for the life of their FHA loan. The bill would remove this requirement and would make FHA mortgages more affordable for many American families.
The president of the National Association of Realtors, William Brown, agrees with Waters’ assessment. He stated in late 2017 that lower income Americans often want to get an FHA mortgage, but policies such as life of the loan MIP make it more difficult for borrowers to afford the loan. He also said that mortgage insurance for life encourages people with a lot of equity to refinance to a conventional loan after they have 20% equity in their homes. This is a missed opportunity to boost the strength of the FHA program.
We support the bill that Waters has sponsored and hope it is passed soon so people can cancel their MIP once they have 20% equity in their home.
Below are some of the reasons we support Maxine Waters on this mortgage bill:
#1 Cost of MIP
Private mortgage insurance is expensive, and FHA loan holders are among those least able to afford it. MIP can cost as much as 1% of the loan amount on a yearly basis. This means for a $100,000 loan, you could pay $1000 per year, which is $83 per month. It can easily be $200 per month for many homes in the US in the $200,000 range. Two hundred dollars per month is a lot of money for people with a lower income!
#2 May Not Be Tax Deductible
As of 2017, PMI and MIP were tax deductible, but this is only true if the adjusted gross income for the borrower is under $109,000. This means that many families with two incomes will be left out. The ability to deduct mortgage insurance costs from your taxes is due to a special tax law that has been extended every year for years. But it is unknown if this will continue.
#3 Heirs Get Zero
When most homeowners hear about insurance, they think that their family will get something if they die. This is not true with mortgage insurance. The mortgage company is the only beneficiary if you die. The proceeds will be paid to the lender. If you want to protect your family so they have money if you die, you have to have a life insurance policy. Do not think that your mortgage insurance will help anyone other than the lender.
#4 Throwing Money Away
Paying mortgage insurance for the entire life of the loan is crazy. If you were able to take that money and invest it into a mutual fund with deferred tax obligations, such as in an IRA, you easily could have hundreds of thousands of dollars after 20 years.
#5 Cannot Be Cancelled
It is simply unfair that MIP on FHA loans cannot be cancelled at all, but you can do so if you are paying PMI on a conventional loan. This is essentially discriminatory against people with lower incomes who get an FHA loan.
The only way that you can ever cancel MIP on an FHA loan for loans issues after mid 2013 is to put down 10% or more. In those cases, you can cancel your loan after you have paid on time for 11 years. So even when you put down well more than the minimum of 3.5%, you can only cancel after 11 years!
Maxine Waters in the News
In April, Rep. Maxine Waters introduced a bill aimed at reducing the burdens of homeowners that have FHA mortgage insurance. The GOP in Congress and the Trump Admin did not take up her bill, but this was another example, of Waters once again fighting for American homeowners.
On Monday, June 18, 2018, Rep. Maxine Waters introduced a bill to increase homeowner protections to prevent foreclosure. She is the ranking Democrat on the House Financial Services Committee, and Waters has made reforming the FHA and FHFA a few of her missions.
Maxine Waters said in a statement “Despite the lessons learned during the foreclosure crisis, we continue to uncover evidence of bad behavior by our nation’s mortgage servicers.” She continued, “Borrowers can’t choose their servicer so it’s especially important that Congress provide strong protections to prevent servicers from taking advantage of borrowers and to protect borrowers from foreclosure.”
This new bill would grow the Federal Housing Finance Agency’s oversight of mortgage service companies that do business with Fannie Mae and Freddie Mac.