THE BASIS POINT

Decent News for FHA Refis: Obama’s Latest Plan

In a couple hours, President Obama will detail an announcement today that will allow for existing FHA loanholders to do streamline refinances with less mortgage insurance.

A streamline refi means you don’t need an appraisal (and sometimes don’t need income verification), so that would enable underwater homeowners with FHA loans to refinance out of their existing loans.

This is interesting because right now there are lots of FHA loans with rates much higher than current 30yr FHA rates of 3.75% no points. Problem is that these people can’t refi because the FHA requires streamline refinances (whether underwater or not) to provide 5% savings to the borrower—sum of new mortgage payment, taxes, insurance, mortgage insurance (PITI) must be 5% or more lower than existing PITI.

You can’t hit this target with FHA loans from the past couple years because those loans were done before the FHA increased mortgage insurance to the existing formula: 1% up-front mortgage insurance and 1.1%-1.15% for annual mortgage insurance.

The loans people have now have much lower mortgage insurance from before the FHA hiked those fees. So even with a new 3.75% rate now, the new PITI doesn’t provide the 5% benefit needed to qualify for a streamline refi.

The announcement today says that mortgage insurance for streamlines will change as follows: .01% for up-front mortgage insurance and .5-.55% for annual mortgage insurance.

This will make the borrower benefit qualifying formula work for more people, and they can get into 3.75-range 30yr fixed loans.

CRITICAL: this is for streamline refinancings only, and only for refinancing loans originated prior to June 1, 2009.

It would be a boon if the date threshold wasn’t there since a few FHA fee hikes that prevent the 5% threshold from being met have happened since then. But I can say from the trenches that this opens up some options that didn’t exist before.

So does this replace that FHA fee hike alert from February 27?

No. That plan is for new homebuyers and also refinancers that don’t meet the parameters above.

More to come as details emerge.