NEW YORK (CNNMoney) -- In an effort to bolster its capital reserves, the Federal Housing Administration is planning to hike the insurance premiums it charges borrowers.
Beginning April 1, the agency, which is the largest insurer of low-down payment mortgages, will raise the up-front insurance premium it charges borrowers by 75 basis points to 1.75% of the base loan amount.
In addition, annual insurance premiums will go up 0.1 percentage point for loans under $625,500 and 0.35 points for loans that exceed that amount.
The agency said the hikes are necessary to replenish the agency's declining capital reserves, which fell below the level mandated by Congress back in 2009. Further red flags were raised in November when the agency's annual report warned that if home prices continued to drop in the coming year, the agency's losses could exceed its reserves.
"After careful analysis of the market and the health of the [Mutual Mortgage Insurance] fund, we have determined that it is appropriate to increase mortgage insurance premiums in order to help protect our capital reserves and to continue encouraging the return of private capital to the housing market," said acting FHA commissioner Carol Galante.
Borrowers will be able to roll the higher up-front fees into their mortgage balance, which should help borrowers better afford the cost. Combined, the higher up-front fees and the 0.1 point premium increase are expected to add about $5 to the average monthly mortgage payment for FHA loans, according to the agency.
Even though those payouts may seem nominal, it's bad news for the housing market, said Jaret Seiberg, an analyst with the Washington Research Group. He said the hikes will discourage sales to first time homebuyers by making it more expensive to borrow thereby depriving sellers of potential buyers.
The impact of the increase, however, is less severe than it could have been because most of it is in the upfront fee, which is far less damaging than a boost in the premium, according to Seiberg. Builders will also suffer as FHA-insured loans remain an important source of financing for their buyers, he added.
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