Trump Reverses FHA Mortgage Insurance Cut
In his first few hours on the job, President Donald J. Trump reversed a planned cut in the cost of government-backed Federal Housing Administration mortgages that are commonly sought by low-income and first-time homebuyers.
Lobbying groups such as the National Association of Realtors (NAR) responded predictably, blasting the move. The outcry, however, obscures a crucial truth: the fundamental economics of FHA mortgages haven’t changed.
What happened and who's affected
Created in 1934, the FHA guarantees mortgages for consumers who ordinarily wouldn’t qualify for a conventional loan. In exchange, the agency requires homebuyers to maintain insurance on what they borrow. Trump’s order relates to the cost of that insurance.
How much was at stake? Obama administration officials had set the new mortgage insurance premium for FHA loans at 0.60%, effective Jan. 27, representing a quarter-point cut from 0.85% and $500 in annual savings on a $200,000 mortgage.
Trump’s order prevented the cut from taking effect. Lobbying groups such as the NAR say the move could chill the market for a portion of buyers.
“According to our estimates, roughly 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new-home buyers will be left on the sidelines in 2017 without the cut,” NAR President William E. Brown said in a statement. “We’re disappointed in the decision but will continue making the case to reinstate the cut in the months ahead.”
While the NAR is to be applauded for its commitment, political disagreement over the state of the housing market should delay further changes in the mortgage insurance premium — at least for the foreseeable future.
Outgoing Department of Housing and Urban Development Secretary Julian Castro pointed to “four straight years of growth and with sufficient reserves” when pitching the cut to 0.60% Jan. 9.
Republican lawmakers have since countered that the agency needs funds to guard against a repeat of 2013 when rising defaults on FHA mortgages forced a $1.7 billion federal bailout. Insurance premiums provide a big chunk of the capital the agency keeps in reserve.
The FHA mortgage: good as it ever was
In the meantime, it’s worth noting that demand for FHA products hasn’t waned despite the volatile conditions of the housing market.
For example, monthly FHA mortgage insurance rates have changed five times since the fall of 2010 — rising from 0.55% to 0.90%, 1.15%, 1.25%, and 1.35% before dropping to the current rate of 0.85%.
Throughout that period and still today, FHA mortgages have accounted for less than 20% of loans written for new and existing home purchases. Changing mortgage interest rates haven’t kept people from taking advantage of government-backed loan products, nor should they.
Cash-strapped consumers can put just 3.5% down and still get into a home with an FHA mortgage. Those with lower credit and higher debt also usually qualify, and existing homeowners may be afforded greater flexibility to get cash for paying off higher interest debt via an FHA refinancing.
These are timeless and precious benefits for the low-income and first-time buyers who need them the most. Political football, scary headlines and a few extra basis points of mortgage insurance premiums aren’t likely to change that.