President Obama today announced changes in fees charged to FHA-insured borrowers who wish to refinance into another FHA-insured mortgage as well as significant compensation to servicepersons and veterans who may have suffered financial harm due to mistakes by lenders.
Borrowers with FHA-backed mortgages who use FHA's streamlined refinancing program are currently charged an up-front mortgage insurance premium of 1 percent of the outstanding loan balance and an additional 1.15 percent as an annual premium. FHA is reducing the upfront premium to .01 percent for streamlined refinancing of loans originated before June 1, 2009 and cutting the annual fee to .55 percent. These reductions will save the typical borrower about $1,000 per year before any savings from reduced interest.
The fee reduction will be coupled with a previously announced initiative to "remove the reticence that many lenders have had to provide refinancing to additional families." FHA uses a formula called the "Compare Ratio" to assess lender performance. A lender's ability to do business with the FHA is dependent on this ratio and up to now streamlined refinances have been part of the calculation. Because many of the loans refinanced have been of the vintage that has had such a high default rate lenders have been reluctant to offer new loans out of concern over an impact on their ratio. FHA will now remove those loans from the calculation, hopefully reassuring lenders and opening up the program to more borrowers.
The assistance to servicemembers is slightly different than what was reported earlier. The White House said the settlement arranged with lenders is "on top of" the $25 billion settlement announced last month with five lenders, federal agencies, and 49 of the state attorneys general. Under the new agreement the lenders will conduct a review of every foreclosure of a servicemembers home since 2006 to check for violations of the Servicemembers Civil Relief Act (SCRA). Any who were wrongly foreclosed will receive compensation equal to the larger of the equity they lost plus interest and $116,785 or an amount provided for the same violation through a review conducted by the banking regulators. There will also be refunds for servicemembers who were wrongly denied the opportunity to refinance to lower interest rates and relief for servicemembers who had to sell their homes for less than the mortgage balance due to a Permanent Change in Station.
Going forward the lenders will extend certain foreclosure protections afforded under SCRA to those serving in harm's way regardless of when that mortgage was obtained (it previously applied only to mortgages obtained prior to active duty) provided that the servicemember was receiving Hostile Fire/Imminent Danger Pay and was stationed away from home within nine months of the foreclosure. The lenders will also pay $10 million dollars into the Veterans Affairs fund that guarantees loans on favorable terms for veterans.
Although The President was clear to note "we don't need congress to do this," he reiterated his commitment to expand refinance offerings beyond today's announcement:
"Congress should give every homeowner the possibility to refinance their home at historically low rates." If Congress refuses, I'll continue to do everything in my power to act without them."
