The Department of Housing and Urban Development is acting to lower the cost of home ownership for buyers with federally-insured mortgages by cutting their up-front premiums by a third and eliminating the annual 50-basis-point premium after borrowers build up equity equal to 22 percent of their homes' original value.

In addition, current FHA borrowers will receive premium refunds under HUD's new Homebuyer Savings Plan, which was announced at the Mortgage Bankers Association's annual convention in San Francisco yesterday.

HUD also said it was embarking on a new $10 million advertising campaign advising consumers to "buy now" because housing "has never been more affordable."

The "across-the-board" reduction in the up-front premium from 2.25 percent to 1.5 percent of the loan amount will mean a savings in closing costs of $750 for borrowers with a $100,000 mortgage. Those with mortgages at the FHA maximum of $197,621 will save about $1,650.

The reduction will be effective Jan. 1.

Elimination of the annual premium when the loan balance reaches 78 percent of the property's original value is modeled after legislation passed by Congress in 1998 that requires private mortgage insurers to drop their coverage at that point.

"That's what Congress mandated for PMI," HUD Sec. Andrew Cuomo said in announcing the three-part plan. "We are going to do it on our own."

FHA Commissioner William Apgar said it will take the typical borrower 10-11 years to pay down a $100,000 mortgage to 78 percent of original value. But it could take more or less time, he added, depending on the interest rate, the size of the downpayment and the loan's term.

Unlike in the private sector, however, the FHA will continue to insure the mortgage after the premium has been canceled. "Coverage will remain in force to protect lenders, but we think (that by then) home buyers will have paid more than enough," Sec. Cuomo told reporters following his speech.

"It's the best of both worlds," said Howard Glazer, the MBA's chief lobbyist.

Together, HUD estimates the lower up-front premium and the elimination of annual premiums will save an average of $1,500 over the life of a $100,000 mortgage, an amount Sec. Cuomo said "can be all the difference in the world" to would-be home owners.

Premium refunds will be granted to FHA borrowers whose loans are at least seven years old when they sell their homes or refinance their mortgages. FHA Commissioner William Apgar said about 220,000 borrowers will be eligible for refunds of up to $700 next year.

In total, HUD figures about a million families will save more than $1 billion a year under the three-point initiative. But none of the money will come from FHA's $16 billion reserves, Sec. Cuomo said.

"Even after implementing the Homebuyer Savings Plan, we estimate that the economic value of FHA's insurance fund will continue to grow to an estimated $34 billion by 2006," the secretary said.

That's a far cry from just eight years ago, when the FHA's Mutual Mortgage Insurance Fund has a negative economic value of $2.7 billion.

"Our first order of business was to solidify the fund," said the nation's tenth and youngest HUD secretary. "Our capital ratio is now 3.5 percent, and we want to go to 4 percent. But we can do that and still have money to invest in housing."

Sec. Cuomo said he expects the cuts to "immediately stimulate additional home buying affordability" and help boost the nation's home ownership rate to even greater heighths. The ownership rate as of the third quarter was at a record 67.7 percent.

"Where do you go from here?" he asked the convention. "You go even higher because you can. And FHA will lead the way."

Published: October 31, 2000

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