The banking industry is doing just great. According to the Federal Deposit Insurance Corporation (FDIC), the nation's bankers took in $157.4 billion during the past year and have seen increasing profits in 17 out of the last 18 quarters.
But all is not rosy. When it comes to mortgages, the banking industry has hit a wall. Or maybe a ditch. The FDIC says mortgage activity has swooned. The origination of one- to four-family residential real estate loans intended for the secondary market fell 62 percent during the past year.
Refinancing Activity Halts
The problem is not that a lot of lenders have stopped lending, instead interest in refinancing has fallen because a lot of borrowers have already taken advantage of historically low rates and replaced old loans during the past few years. Looking toward the future, the Mortgage Bankers Association predicts that purchase money mortgages -- the financing used to buy homes -- will increase by 3.8 percent this year while refinancing activity is expected to drop 60 percent.
The result of less refinancing activity is that a large amount of mortgage industry employment is disappearing -- one major lender is expected to end 8,000 mortgage jobs this year. Not only are jobs going away, so are the revenues and profits that loan originations represent.
Can we do anything to help our beleaguered banking system? With something that also benefits borrowers? You bet. We can take another look at FHA mortgages.
Go back to 2012. If you had an FHA mortgage issued before May 31, 2009 the government would allow you to refinance your loan at current rates. The upfront mortgage insurance premium (MIP) would be just .01 percent -- that's $17.50 for a $175,000 mortgage. No less important, the annual MIP would fall to .55 percent.
"By refinancing through this streamlined process," said HUD, "it’s estimated that the average qualified FHA-insured borrower will save approximately $3,000 a year or $250 per month. FHA’s new discounted prices assume no greater risk to its Mutual Mortgage Insurance (MMI) Fund and will allow many of these borrowers to refinance into a lower cost FHA-insured mortgage without requiring additional underwriting."
The catch is that if you look at the government's offer to refinance FHA mortgages, it only applies to loans made before May 31, 2009 -- nearly five years ago. What makes that date sacred?
Instead of a static date for refinancing, why not have a rolling date? Simply say that FHA mortgages which are at least 36 month old and with borrowers who have not paid late or missed payment automatically qualifies for an FHA streamline refinance with new and lower MIP charges?
How many FHA borrowers would be impacted? The FHA originated 1.831 million loans in 2009 but the refinancing program stopped in mid-year, meaning perhaps half of all 2009 borrowers cannot be considered for an automatic refinance. Another 1.667 million FHA mortgages were originated in 2010 plus 1.2 million more in 2011.
A lot of people could plainly benefit with a slight change in FHA rules. Not only would the FHA continue to collect MIP charges, it would also come out ahead because borrowers would have smaller monthly costs -- a sure way to retain borrowers and reduce delinquencies.