By Lew Sichelman
April 19, 2013

The lending landscape shifted measurably this month when the standard-bearer for first-time buyers and low-to-moderate income borrowers became more expensive than its private business counterpart.

On April 1, fees for low-down-payment mortgages insured by the Federal Housing Administration rose for the third time in two years. The hike in fees serves a twofold purpose: to help shore up the FHA’s sagging mortgage insurance fund, which is dangerously low; and to reduce the government’s footprint in the mortgage market.

Only time will tell whether the first objective will be reached. But the second goal — allowing private mortgage insurance companies to gain a larger market share — probably will be met because PMI is now the less expensive alternative.

How much less expensive? Over a five-year period, borrowers with a 760 FICO score who make a 5% down payment on a 30-year, $170,000 mortgage could save more than $4,000 by opting for a loan insured by Genworth Financial, one of six private mortgage insurers.

Of course, most folks don’t have credit scores that high. But for nearly all borrowers who can come up with a down payment of at least 3.5% on a loan of up to $625,000, PMI is now probably the better deal.

The FHA has always been the first choice of borrowers with low down payments who couldn’t meet the private sector’s more rigid underwriting standards. And during the housing debacle, the agency picked up the slack as private insurers backed out of the market. A couple of companies even went out of business altogether.

But the FHA paid dearly for its efforts in supporting the market. Foreclosures are up significantly, and the health of the insurance fund from which claims are paid is at or below the level required by Congress.

So, as of April 1, the agency raised its annual premium by 0.05 percentage point to 0.1%, depending on the loan amount and the all-important loan-to-value ratio. That’s on top of an earlier 0.1 percentage point increase in the annual fee instituted last April, as well as the hike in the upfront mortgage insurance premium, to 1.75% of the loan amount from 1%.

As a result, the choice between mortgages with private mortgage insurance and those insured by Uncle Sam has never been clearer.

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