Suspension of MIP Decrease = Instatement of Conundrums

Timothy A. Raty

It’s dubious whether, at the time the Department of Housing and Urban Development (“HUD”) suspended[i] their recent rule which would have decreased annual mortgage insurance premiums (“MIPs”) on FHA-insured loans,[ii] anyone realized that at least two conundrums would occur as a result, with negative consequences affecting both creditors and consumers.

The first conundrum relates to disclosures provided pursuant to Federal law, particularly Regulation Z (12 CFR Pt. 1026). If the rule decreasing MIP premiums would have taken effect, premiums would have been lowered for loans which have a “Closing/Disbursement” date[iii] on or after January 27, 2017. As such, the Loan Estimates and Closing Disclosures (together referred to as “Integrated Disclosures”) for these loans would have had to reflect such lower premiums, since both documents must reflect “the terms of the legal obligation between the parties.”[iv]

More specifically, the disclosures on the Loan Estimate must be provided “in good faith”[v] and, at the very least, be based on “the best information reasonably available to the creditor at the time the disclosure is provided to the consumer.”[vi] The disclosures on the CD must reflect “the actual terms of the transaction.”[vii] MIPs must not only be disclosed in certain sections of the “Other Costs” tables of these documents[viii], but must also be reflected in other disclosures affected by MIPs, such as the “Mortgage Insurance” and “Total Monthly Payment” rows of the “Projected Payments” table.[ix]

Due to the suspension, Integrated Disclosures reflecting the new MIPs became inaccurate. This may have caused creditors to issue revised Integrated Disclosures, not only to comply with the “good faith” standards for both documents, but also to “reset tolerances”[x] due to the fact that the amounts of MIPs increased over the amounts originally disclosed, thus potentially causing the aggregate of fees subject to the so-called “10% Tolerance bucket” under Ibid. § 1026.19(e)(3)(ii) to increase past the level of “good faith.” If creditors failed to revise such estimates, they may have been forced to pay for the difference between the premium amounts disclosed as part of a “tolerance cure.”[xi]

While the suspension negatively affected creditors, it also negatively impacted consumers as well. Applicants, whose initial Loan Estimates may have reflected the lower monthly payments based on the anticipated decrease in MIPs, could have indicated an intent to proceed with the transaction based on this information. However, they would soon discover that their monthly payments would be higher than expected, due to the suspension (by approximately $500 a year or $41.67 a month, according to one estimate of averages[xii]).

Whether this increase may have caused some consumers to either abandon or restructure these loans is not known, but it is safe to assume that this was an unpleasant surprise for any affected by the suspension.

The second conundrum is tied to the fact that at the end of last year, HUD announced that it would increase the forward mortgage limits for loans with case numbers assigned on or after January 1, 2017. [xiii] National high cost area mortgage limits were increased as follows:

This change indirectly impacted how MIPs are charged for single-unit dwellings. To illustrate, consider the fact that had the decrease in MIPs taken effect, premiums would have been charged based on the following table, which illustrates both the “previous” MIP and the “new” MIP which would have been charged[xiv]:

As illustrated, when “Base Loan Amount” is solely considered during 2016, basis points for single-unit dwellings (which could not exceed $625,000) are lower than those which could apply to multi-unit dwellings  (i.e. single-unit dwellings could only meet the “≤ $625,000 Base Loan Amount” criterion, while multi-unit dwellings could meet any of the criteria). In 2017, had the decrease taken affect, basis points would have differed based only on loan terms and LTV ratios.

However, because of the suspension, the criterion of “Base Loan Amount” is still applicable and, due to the change in loan limits last December, loans secured by single-unit dwellings may now exceed $625,000. Therefore, the higher basis points which are normally assessed for loans secured by multi-unit dwellings may now be assessed against loans secured by single-dwellings, if the loan amount is between $625,000 and $636,150.

For example, basis points for a purchase, FHA-insured loan, the amount of which equals the maximum allowed by HUD in a high cost loan area (in 2016, $625,000; in 2017, $636,150) could or can be assessed as follows:

In essence, consumers obtaining a high-end loan for a single-family dwelling will pay the same premiums as those consumers obtaining a loan for a multi-unit dwelling. While this may not seem like a big deal, considering these consumers are likely “well off” financially, the fact of the matter is that consumers obtaining multi-unit dwellings may be renting out one or more units and, thus, generating income off the property, which helps to offset the higher premiums. This is most likely not the case for consumers obtaining a single-unit dwelling.

Whether or not HUD will re-implement the final rule decreasing MIPs, revise it, or permanently suspend it is unknown at this time. What is known is that the allegedly “temporary” suspension has not only caused unintended problems for creditors and consumers alike, but have cost either or both parties money.

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[i] See FHA ML 2017-07

[ii] See FHA ML 2017-01

[iii] “Closing/Disbursement date refers to the later of the date of the signing of the Mortgage, or the date of disbursement of the loan proceeds, as is entered in FHA Connection.” (FHA ML 2017-01)

[iv] 12 CFR § 1026.17(c)(1)

[v] 12 CFR § 1026.19(e)(1)

[vi] 12 CFR Pt. 1026, Supp. I, Paragraph 19(e)(1)(i) – 1

[vii] 12 CFR § 1026.19(f)(1)

[viii] See 12 CFR Pt. 1026, Supp. I, Paragraphs 37(g)(2) – 1 & 3, 37(g)(3) – 3, and 38(g)(2) -1.

[ix] See 12 CFR §§ 1026.37(c) & 1026.38(c), including associated Official Staff Commentary, for details.

[x] Pursuant to 12 CFR § 1026.19(e)(3)(iv)

[xi] See 12 CFR § 1026.19(f)(2)(v)

[xii] See http://money.cnn.com/2017/01/20/real_estate/trump-suspends-fha-premium-rate-cut/

[xiii] See FHA ML 2016-20 & 2016-25

[xiv] Table republished from FHA ML 2016-20.