You\’ve heard the news. President Trump announced a freeze around the expected 25-basis point FHA premium cut merely a week or so after it was announced.
For most folks, it was an unexpected and sad ending to your seemingly positive announcement that would have saved the average FHA buyer about $500 annually.
That money can have ostensibly gone back into the economy, through home improvement or general spending. It may well have also made FHA mortgages more affordable and perhaps a stronger alternative to conventional financing.
Instead, the premium cut has become put on ice, likely so as to reduce the government\’s footprint during the mortgage industry.
It should be noted it\’s mostly not necessarily dead in the water, meaning the discussion is ongoing.
Two major players have previously weighed in on the move, so let\’s look at the potential pros and cons of Trump\’s action.
The Pros of any FHA Premium Cut
It seemed most in the field were in favor of a premium cut, for example the all-powerful National Association of Realtors, which tends to be hot for lower home buying costs.
The National Association of Home Builders (NAHB) also revealed that it supported the proposed rate cut, saying it will \”reduce the cost of housing for creditworthy borrowers, for first-time home buyers.\”
And a poll conducted by Inside Mortgage Finance found just 14% of the respondents were against an FHA premium cut.
After HUD announced on January 20th that this FHA premium rate cut was \”suspended indefinitely,\” NAR President William E. Brown released your firm stand out noting that \”roughly 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new homebuyers shall be left on the sidelines.\”
So, there\’s your very first pro-if the cut is unfrozen, not wearing running shoes could be, eventually, nearly tens of thousands of home buyers will face lower costs because of cheaper FHA insurance premiums.
Additionally, and perhaps more importantly, as many as 40,000 real estate buyers won\’t miss out on homeownership in case the rate cut actually happens.
NAR also estimated that your average buyer of a home through an FHA loan would save $500 every year in insurance costs. That\’s another pro, assuming it happens.
The Cons of an FHA Premium Cut
Then you have the other side of the coin, that\’s presented by Edward J. Pinto, men who has been an outspoken critic in the FHA for a long, long time. He\’s also a couple of men behind the Wealth Building Home Loan (WBHL).
Pinto once referred to the FHA being a predatory lender, though like to see . that article can no longer be found on the American Enterprise Institute (AEI) website where he\’s a resident fellow. The basic argument was that the FHA overcharges low-risk borrowers to subsidize rates for high-risk borrowers.
In response to the FHA cut suspension, he explained the move was \”actually fantastic news for first-time buyers,\” as his research apparently shows a really cut would just increase demand when inventory is already dismal.
The basic premise is a good idea C cheaper borrowing costs might mean more demand, which could actually increase home and offset any financial gain related to the MIP cut.
And one could argue that the last thing the housing marketplace needs is more demand. Truth be told, it needs more inventory, and fast, so prospective homebuyers can actually find a suitable property to obtain.
Most importantly, starter homes have been in short supply, and who have\’nt experienced it the housing market can\’t maintain its rapid ascent.
Lower premiums also mean less go into the FHA’s coffers, meaning fewer dollars will likely be set aside for loan losses in case of another housing crisis.
In summary, a MIP cut could already have got the unintended consequence of raising homeownership costs via increased selling prices. That would be accompanied by higher deposit, an issue that continues to be more of a hurdle than monthly home loan payments.
Still, the policy reversal will undoubtedly come as a big blow to the many seeking to purchase their first home, especially those already in contract who\’ll find out their payment will not as low as they expected.
That may lead to some fallout in the short term.
Reverse Mortgages the reason for Lack of a Cut?
Update: As it turns out an FHA premium cut can have pushed the agency’s Mutual Mortgage Insurance (MMI) Fund Capital Ratio to one.76%, which is below the statutory minimum.
It could have led to a $3.2 billion loss of cash flow and a $45 billion increase in the FHA\’s cumulative Insurance-in-Force (IIF).
As such, I wouldn’t expect the FHA to slice premiums anytime soon.
Funnily enough, it\’s reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs) which can be the problem, not traditional forward mortgages.
Apparently the FHA\’s forward mortgages had a positive economic net worth of $38.4 billion in fiscal year 2017, contributing $4.2 billion towards the Fund.
Meanwhile, the 2017 HECM portfolio enjoyed a negative economic net worth of $14.5 billion.