UPDATE 1-US FHA set to increase borrowing costs next month
(Recasts with date of increase in cost; fixes typo in "cash-strapped")
By Corbett B. Daly
WASHINGTON Aug 6 (Reuters) - The Federal Housing Administration plans on Sept. 7 to raise the cost of loans backed by the agency in an effort to strengthen its cash-strapped balance sheet.
The move follows Senate approval this week of a bill to allow the FHA to nearly triple the annual fees it charges borrowers, although the FHA plans more modest increases at first. The House of Representatives had already approved its version and President Barack Obama is expected to sign the bill this month.
Under the law, the FHA would have the authority to raise annual mortgage insurance premiums -- paid by the borrower over the life of the loan -- to a maximum 1.5 percent.
That is up from the current 0.55 percent maximum, although FHA Commissioner David Stevens has said the premium would rise gradually -- first to 0.85 percent or 0.9 percent, depending on the size of the borrower's down payment.
The new fees are expected to raise about $3.6 billion annually for the FHA.
The FHA, which does not make loans directly, guarantees loans made to borrowers who meet certain restrictions.
As the mortgage crisis unfolded and private lenders began to pull back from lending, the FHA's total volume rose from $54 billion in 2006 to $376 billion in 2009, according to Inside Mortgage Finance, an industry publication.
The FHA's market share of total originations topped 20 percent in the three months through June, more than 10 times the share in 2006, when it was less than 2 percent.
While raising the annual premium, the FHA has said it also plans to lower a separate upfront premium from the current 2.25 percent to about 1 percent to offset the cost of the annual premium. The upfront premium is paid at the time a loan is issued.
Stevens has said it makes more sense for the fees to be paid throughout the life of the loan in the annual premium instead of forcing borrowers to pay them when the loan is made.
New borrowers would pay an average of just under $40 per month more under the new fee structure.
The minimum down payments are still 3.5 percent for most borrowers. Lawmakers struck down a Republican proposal to raise them to 5 percent.
The FHA has capital reserves equal to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures, well below the 2.0 percent required by law, according to an independent actuarial study released late last year. A new study is expected to be released this fall.
The House has also passed a broader bill to strengthen the FHA's enforcement capabilities. The Senate is expected to consider its version of the broader bill after senators return from their summer recess in September. (Reporting by Corbett B. Daly; Editing by XXX)
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