Ok, I’m the first to admit that I’m not a mathematical genus.  I’ve said for years that it only takes 3rd grade math to be a lender, which suites me perfectly.  So when I heard that FHA’s changing their mortgage insurance to increase their MIP reserves (scheduled to go into effect October 4th of this year) I just assumed that they would take steps to increase the amount collected to accomplish their goal.  I’ve run the numbers and for a typical FHA borrower the monthly payment will go up by about $23 per $100,000 in sales price at today’s rates.

I can understand HUD’s concerns.  FHA is a major player in today’s housing arena.  It provides financing for people with less than perfect credit, and who do not have as much money for a down payment.  Increasing the MIP fund’s health is in everyone’s best interest.  Here’ the problem.  THE NEW SYSTEM WILL DRAMATICALY DECREASE DEPOSITS INTO THE MIP INSURANCE FUND!  No, really, it’s true.  This is because they DECREASED the amount they are collecting up front – money that goes directly into the MIP insurance fund at close of escrow, and raised the annual premium.  Based on my ability to do basic 3rd grade math, I’ve calculated that it will take almost 4 years before the increase in annual premiums will give HUD more money than they would have under the current plan from a loan done TODAY.  That’s assuming that the loan does not go into default, or that the borrower doesn’t sell or refinance out of FHA before then.

Here’s how it works.  Currently FHA collects 2.25% up-front MIP that is added to the loan amount, and charges monthly MMI at .55% per year.  That 2.25% goes directly into the MIP fund when the loan is insured and then collects monthly MMI premiums at a .55% annual rate.  The new factors call for a 1% up-front MIP and monthly MMI to be between .80 and .90 – depending on who you listen to.  I used the .90 MMI – which is the highest annual premium I’ve heard – in my example below.  These numbers are based on a $100,000 base loan, maximum loan-to-value.  Amounts deposited decrease because the monthly MMI is based on the loan balance.

                               Old Method                                New Method              

                               Deposited         Total to Fund   Deposited        Total to Fund    Difference

At close              $2,250             $2,250               $1,000               $1,000               $1,250 less

After 1 year      $   550              $2,800               $   900                 $1,900               $   900 less

After 2 years    $   541              $3,341                 $   885                  $2,785              $   556 less

After 3 years    $   531              $3,871                 $   870                 $3,655               $   217 less

After 4 years    $   522              $4,394               $   854                   $4,509               $   115 more     

 I’m not taking into account the present value of money that would probably show that the MIP fund is still not even after 4 years; that’s too much and I’m trying to keep this to 3rd grade math.  I’m also not calculating how long it will take for the MIP Insurance fund to actually see a benefit – if it ever will!  There are way too many factors to consider, but I really don’t see any way the fund’s reserves increase under the new plan – ever!

 So what am I missing?  I really can’t see any benefit to the MIP fund – in fact deposits to the MIP fund will immediately go down – and the buyers will be paying a higher payment.  It appears to me to be a lose-lose proposition.  Can they really be that stupid, or am I missing some significant fact?  I would really like to know where my logic is flawed.  Really!  I hope I’m absolutely wrong on this, but I can’t figure out how.