(Updates to restore dropped words to paragraphs 13-14)
By Margaret Chadbourn
WASHINGTON, Feb 27 (Reuters) - The cost of government-insured mortgages will increase slightly for many new U.S. homebuyers under a decision announced on Monday by the Federal Housing Administration.
The FHA, which backs about a third of all new mortgages, said it would raise the up-front fees on the mortgages it insures in an effort to shore up its dwindling capital and encourage the return of private lenders into the market.
It said the premiums it charges to insure mortgages will rise by 75 basis points, or 0.75 of a percentage point, on most 30-year loans. The change, which takes the up-front premium to 1.75 percent, would apply to mortgages taken out after April 1.
The premium increase will raise about $1.25 billion for the FHA, the agency’s acting commissioner, Carol Galante, told reporters on a conference call. She estimated it would add about $5 to the monthly payment on an average $150,000 FHA loan.
“These marginal increases are affordable for nearly all homebuyers who would qualify for a new mortgage loan,” the FHA said in a statement.
The premium hike is just the latest step the FHA has taken to bolster its capital reserves, which fell to a record low of $2.6 billion last year.
It comes on top of a previously announced increase of 10 basis points, or 0.10 of a percentage point, for many FHA loans that also takes effect this year. For so-called jumbo loans above $625,500, the increase was 35 basis points.
The agency is also slated to collect about $1 billion from the Obama administration’s settlement with the country’s largest lenders over irregular foreclosure paperwork.
Galante, who said the premium increase would “encourage the return of private capital in the residential mortgage market,” declined to rule out the possibility of further hikes.
“If the economy changes, if something else happens, we have to be vigilant here,” she said.
The FHA has sharply increased its share of the mortgage market since the depth of the financial crisis in 2008. In 2006, its share of the new loan market was just 5 percent.
FHA provides a critical source of funding for first-time home buyers and those with modest incomes. The agency does not make loans but instead insures qualified lenders against losses if borrowers default. With an FHA loan, buyers can put down as little as 3.5 percent.
Guggenheim Partners analyst Jaret Seiberg said the fee would be “negative for housing” because it would discourage first time buyers from entering the market, which still needs time to recover.
“First time buyers represent the heart of the market,” Seiberg said in a client note.
FHA loans are often taken out by those who cannot qualify under the stricter down-payment and credit-score requirements of Fannie Mae or Freddie Mac, the government-run buyers of a majority of all home loans.
“This change should reduce FHA volume, but we question how much this will benefit the banks,” Seiberg said. “The banks may decide to portfolio some of these loans, but we believe the vast majority will still be sold to Fannie and Freddie.” (Reporting By Margaret Chadbourn; Editing by Andrew Hay and Richard Pullin)