After the announcement that the Federal Housing Authority is low on cash, HUD secretary Shaun Donovan is determined to repeal a government policy that allows FHA borrowers to cancel mortgage insurance premiums, when the LTV (loan to value) ratio on their loan falls below 78%.

He told the Senate Banking committee that due to the continuing low interest rates, that the revenue from this new policy will be substantial. Plus the lower the rates the faster the monies can be applied to the principal. He also added that the new loans will therefore, "be on our books for a long time."

The FHA's Mutual Mortgage Insurance fund is estimated to have lost 10-12 billion of dollars in premiums due to the LTV cancellation policy during 2010-2012. (Private mortgage insurers allow for policy cancellations when the LTV reaches 80%.)

HUD is currently drafting a mortgagee letter to repeal the cancelation policy. The change will apply to newly originated loans. It is outlined that the Federal Housing Administration will also increase its monthly premium from 125 bps or 1.25% to 135 bps or 1.35%

Loan Officers, Brokers, Bankers and Credit Unions are also hoping the change in FHA premiums will increase refinancing from FHA to Freddie, Fannie or VA backed loans.

In fact, FBR Capital Markets recently stated, "We believe that the policy change that requires FHA insurance premiums over the life of the loan could produce support for additional refinancing activity from the FHA to loans securitized by Fannie and Freddie. This would allow borrowers to remove an annual premium of 1.35%," the FBR analysts write in their report, "Future of Housing & Mortgage Markets: Winners & Losers."

At this time they have not confirmed the date for this repeal to go into effect in 2013.

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