Trump Administration Suspends Cut in FHA Mortgage Insurance Rate
For 11 days we had one last gift from Obama’s administration dedicated to the housing market. We are talking about the mortgage-fee reduction announced on January 9 that was supposed to become effective on January 27. It was a cut with 0.25 percentage points on the fee charged by the Federal Housing Administration (FHA) to mortgage borrowers when taking out government-backed home loans. These fees the borrowers pay feed the FHA’s Mutual Mortgage Insurance Fund used to cover losses from insured loans that falter.
The reduction was not big but would have saved millions of homeowners an average $ 500 per year, and even more to people with larger house loans.
The FHA Role
We are talking about millions of borrower for the FHA loans are very popular among first time home buyers and people who do not qualify for regular loans for FHA loans offer more permissive conditions for those with lower credit scores and those who need less down payment than the traditional 20% to purchase a house. With FHA the down payment can go as low as 3.5 percent of the purchase price.
The down side for borrowers when working under the FHA umbrella is they have to pay insurance premiums. These premiums correlated with increasing real estate prices can make the monthly installments quite high. Specialists are also forecasting increased mortgage rates in 2017 and this seems to be a realistic trend when rates for a 30-year fixed mortgage loan increase last year from 3.81% to 4.09%.
Under these circumstances, the fee reduction was more than welcomed and would have help borrowers maintain their annual housing costs, not make real savings.
Obama’s decision was criticized by the republicans on the spot. Rep. Jeb Hensarling, who chairs the House Financial Services Committee, considered that this FHA fee reduction is a poisoned gift for the institution’s financial strength will be shaken and in the end the taxpayers will be forced to bailout FHA again as in 2013, when they have to pay $1.7 billion to save FHA from a collapse.
During Ben Carson questioning at the confirmation hearing for the Head of Department of Housing and Urban Development (HUD), Department that subordinates Federal Housing Administration (FHA), Senator Pat Toomey from Pennsylvania spoke about his concern over FHA’s capital ratio. “The capital ratio that is the statutory requirement minimum is 2 percent, it’s only at 2.32 — this strikes me as very little buffer above the minimum…” the senator said.
Between the Republican standpoint and Trump’s campaign slogans that he will have the government work for the people, it was not clear if the fee cut will survive the new administration. Many believed it will be a hard decision that will take a lot of analysis and consideration.
Now it’s clear, it didn’t survive for the decision was reversed in the first hours after Donald Trump was sworn in as president.
This was the first executive action by the new Trump administration to block the quarter of percentage point cost reduction of mortgages for millions of home buyers and not something related to immigration, health care, trade or other hot campaign topics.
The announcement was made a little bit later, on Friday January 20, by the Department of Housing and Urban Development announced, via a letter signed by the Deputy Assistant Secretary for Housing Genger Charles, that the decrease to the annual mortgage insurance premiums borrowers pay when taking out government-backed home loans has been "suspended indefinitely."
You should see the other side of the coin as well: FHA capital ratio will be strengthened and the agency will be better equipped to survive in dire straits.
In the end, one question arises. As an FHA borrower, what would you have preferred: $500 this year and the next ones, for the life of your loan, or solid state agencies also for your benefit, as a taxpayer? This is a rhetorical question for the decision was already taken.