Almost immediately after being sworn into office, President Donald J. Trump suspended a pending rate cut to FHA mortgage insurance that the outgoing administration implemented just a week earlier.
The Federal Housing Administration (FHA) announced Jan. 9 that it would reduce the annual insurance premiums most borrowers will by pay by a quarter of a percent, saving the average homeowner $500 this year. In places such as San Diego County, where housing prices are much higher, the savings would have been closer to $1,200 per year.
The decision to indefinitely suspend the planned cut was one of the new administration’s first acts.
What exactly is the FHA?
The FHA is a government agency that insures home loans and collects fees from borrowers to reimburse lenders in the case of default. It is part of the Department of Housing and Urban Development (HUD), and the loans FHA insures are aimed at first-time homebuyers and those with less than good credit.
Borrowers can qualify for an FHA-backed mortgage with much smaller down payments, as low as 3.5 percent, even with a credit score below 600. This credit score could signal a past bankruptcy or debts sent to collection which would normally make the buyer a less-than-desired borrower.
What did the new administration do?
The administration immediately stopped a rate cut that the Obama administration had announced just a week earlier. The rate cut was scheduled to take effect Jan. 27. Therefore, no one received a loan with the new, lower insurance rates.
What does this mean now?
If you are in the market for a new home and planned to use an FHA-backed loan, it means you will be paying the same premium rate for required mortgage insurance that you would have since January 2015.
For most borrowers getting an FHA-backed loan that means that after paying an upfront insurance fee, you will pay slightly less than 1 percent of your loan amount for premiums each year. The Obama administration had planned to drop that rate to around half of a percent. In 2014, the rate was 1.35 percent, after several increases to shore up FHA finances after the housing crash in 2007.
How many people would this impact?
During the federal government’s 2016 fiscal year (Oct. 1, 2015 to Sept. 30, 2016), the FHA insured 1.26 million purchase loans and refinances for single-family homes. Nearly 880,000 of those were purchases, worth more than $171 billion.
In the second quarter of 2016, FHA-backed loans accounted for nearly 17 percent of single-family home loans, according to HUD.
Why were the rates cut in the first place?
The Obama administration argued that FHA could easily withstand a cut to premiums, saying the agency’s finances had vastly improved since the FHA received its first bailout in 2013. The $1.7 billion bailout from the U.S. Treasury was given to cover potential losses on the huge volume of low-down-payment mortgages FHA insured from 2007 to 2009 after the collapse of the subprime industry.
“With sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” former HUD Secretary Julian Castro said at the time.
Why did the new administration suspend the rate cut?
Some Republicans had expressed concern that the rate cut could cost taxpayers if the loans started to go sour (as had happened in the past) and the FHA was unable to cover the losses with less money coming in from premiums.
In a letter to those in the real estate industry shortly after Trump was sworn in, HUD said that more analysis and research was needed to assess any future changes in mortgage insurance premiums.
“FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers,” the letter said.
Could the cuts be made in the future?
It’s unlikely as the administration said the rate cut was being suspended indefinitely.
Sen. Pat Toomey, R-Pa., pressed the issue at confirmation hearings for Ben Carson, Trump’s nominee for HUD secretary.
Toomey said the planned rate reduction was “surprising,” since the balance in the fund that backs FHA mortgages is just 16 percent higher than the legal minimum. “This strikes me as very little buffer above the minimum. And after all, as recently as 2013, the FHA needed a bailout,” he said.
“I, too, was surprised to see something of this nature done on the way out the door, which of course has a profound effect,” Carson said. “So certainly, if confirmed, I’m going to work with the FHA administrator and other financial experts to really examine that policy.”