FHA Mortgages Are About to Get More Expensive (Update2)

(Clarifies the nature of delinquencies in eighth paragraph.)

NEW YORK ( TheStreet) -- The Federal Housing Administration (FHA) is raising mortgage-insurance premiums and the minimum down payment on jumbo loans as it takes steps to bolster its severely depleted capital reserves.

The changes will protect the Mutual Mortgage Insurance Fund and also "encourage the return of private capital to the housing market," FHA Commissioner Carol Galante said in a statement.

The FHA will increase the annual mortgage-insurance premium on most loans by 10 basis points, or 0.1%. Premiums on jumbo mortgages -- loans of $625,500 or larger -- will rise by 5 basis points, or 0.05%, to the maximum authorized premium. The increases exclude certain refinance transactions.

Borrowers will also no longer be allowed to stop paying premiums once the outstanding principal on their loan reaches 78% of the outstanding balance.

The FHA's Office of Risk Management and Regulatory Affairs estimates that its Mutual Mortgage Insurance Fund has forgone "billions of dollars" in premium revenue on mortgages endorsed between 2010 and 2012 as a result of this automatic cancellation policy.

As a result, borrowers will now have to pay premiums through the lifetime of the mortgage.

The FHA provides mortgage insurance to lenders on loans that have a down payment as low as 3.5%. The agency gained market share in the wake of the housing bust when private capital withdrew from the market. Together with Fannie Mae and Freddie Mac, the FHA backs more than 80% of current mortgage originations.

In late 2012, the FHA said its mortgage reserves had fallen short of projected losses by $16.3 billion. The agency's reserve ratio was negative 1.4% versus 2% required by law. Edward Pinto at the American Enterprise Institute estimates one in six insured loans are 30 days or more delinquent.

Other actions the agency is taking to boost reserves include raising the down payment on jumbo loans to 5% from 3.5%.

Lenders will be required to manually underwrite loans for which borrowers have a credit score of less than 620 and a total debt-to-income-ratio -- the amount of income that goes toward debt payments -- of more than 43% and will have to justify why they are approving the loans outside these parameters.

The increase in premiums will make FHA loans more expensive for borrowers, allowing private capital to compete more effectively. Raising the bar for jumbo loans should help attract more capital in this category as well.

Separately, the Financial Services Committee said it will hold a series of meetings throughout the year on the FHA's "outsized role" in the housing-finance system and the need for a "sustainable mortgage-finance system."

"The FHA is broke -- bailout broke," Chairman Jeb Hensarling said. "We need a sustainable mortgage-finance system that gives hard-working Americans opportunities to buy homes they can actually afford to keep. Today, however, the FHA's dire financial condition and dominance of our housing finance system are a clear and present danger to every taxpayer who is now at great risk of having to fund yet another Washington bailout. Without serious reform, FHA may become the next Fannie Mae and Freddie Mac."