Gov't To Lower FHA Premiums

The White House moved to cut fees for mortgages insured by the Federal Housing Administration, a move meant to lower costs for lower-income and first-time homebuyers that was welcomed by the industry.

As part of the plan, the FHA will slash the annual premium charged to mortgage borrowers by 0.3 of a percentage point. That means mortgage insurance premiums will go from 0.85% to 0.55% for most new borrowers.

The White House estimates that the change will lower housing costs for some 850,000 homebuyers by an average of $800 per year.

“Today’s announcement is an important step in making homeownership more attainable. FHA-insured mortgages, which accounted for 7.5% of home sales in the third quarter of 2022, are targeted at homebuyers who otherwise may not be able to achieve homeownership,” the White House said in a statement.

Housing trade groups applauded the move, which many have been backing for some time. The Mortgage Bankers Association has been calling for a cut since 2021.

“The lower premiums will expand homeownership opportunities by lowering mortgage payments for qualified FHA borrowers, providing critical relief from the steep rise in mortgage rates and home prices just in time for the spring buying season. This will especially help minority homebuyers and low-and moderate-income households who are predominantly served by FHA loans,” said MBA’s President and CEO Bob Broeksmit.

But critics of the plan believe slashing the premium will end up backfiring and hurting low-income families. Tobias Peter, the assistant director of the American Enterprise Institute’s housing center, argued that market conditions are not favorable for a mortgage insurance premium cut.

“Housing supply remains at historically low levels at 4.0 months and is even tighter for entry-level homes. A premium cut would thus get absorbed into higher prices and do little for affordability,” he said in a blog post. “An MIP cut would amount to a massive wealth transfer from FHA’s capital reserve fund, which ultimately protects taxpayers, to realtors and homeowners in largely FHA neighborhoods.”

Sen. Thom Tillis (R-NC) said in a statement to the Washington Examiner that "it’s troubling that FHA has opted to enact policy which will work to undermine the effectiveness of the Fed’s recent monetary policy actions."

"The Biden Administration should be pursuing policies that eliminate inflation for the American people, not allowing unelected bureaucrats to unilaterally implement counter-productive policies," he added.

The FHA slashed mortgage insurance premiums by an even more aggressive half-point in January 2015, the last such cut. At the time, the FHA predicted that the cut would lead to some 250,000 first-time buyers and would save buyers about $900 per year. Peter said that research showed that home prices actually grew 2.5% faster in FHA neighborhoods and just 17,000 first-time homebuyers entered the market in the years after the cut.

“Instead of helping first-time buyers, the beneficiaries of FHA’s 2015 MIP cut were existing homeowners, who profited from higher asset prices, and realtors, who received an estimated windfall of around $2.8 billion due to increased commissions,” Peter wrote.

After the announcement on Wednesday, Scott Olson, the executive director of the Community Home Lenders of America, said he “strongly commends” the Biden administration’s move.

“Long a top CHLA priority, an FHA premium cut is critically needed to insure minorities and other underserved borrowers have affordable access to mortgage credit, in a period of rising mortgage rates and homeownership affordability challenges,” he said.

The FHA’s Mutual Mortgage Insurance Fund’s capital reserve ratio is required by law to remain above 2% and was sitting at 11% in November. The FHA projects that, with the cuts, the capital ratio will stay above that 2% level.

“We have a very high capital ratio right now — it’s more than five times the statutory minimum of 2%. And what we did was a great deal of analysis and thought and consultation, to make sure we met at a number that we believe is meaningful to borrowers, and will make a difference for those borrowers but that also was prudent from the perspective of the Mutual Mortgage Insurance Fund. And I think we got there,” said FHA Commissioner Julia Gordon, according to Housing Wire.

The cut is expected to go into effect in March. FHA-insured mortgages accounted for about 7.5% of home sales during the third quarter of 2022.

Source: Washington Examiner