The FHA will cut its annual insurance premium by a full half a percentage point, President Obama announced today, in a move designed to boost the sagging popularity of FHA loans and give more borrowers access to affordable housing.
The move reduces the annual premium to 0.85 percent of the loan amount from the former 1.35 percent and makes FHA loans more competitive with mortgages backed by Fannie Mae and Freddie Mac. It's estimated the change will save an average FHA mortgage borrower $900 a year, based on a $180,000 mortgage.
Noting that the annual savings could be a full month's mortgage payment for an FHA borrower, Obama said the change could make all the difference for a family that's seeking to buy its first home.
An additional quarter million home sales?
"Over time, this is going to potentially have an impact over millions of families all across the country," said Obama, making an address on housing issues in Phoenix. "It should help further accelerate growth in the housing market and stabilizing prices in areas like Arizona that have a long way to come back."
The administration estimates the premium reduction will benefit some 800,000 FHA borrowers this year alone, and create an opportunity for 250,000 families to become homeowners over the next three years. Because the premium is charged annual, the 0.5 percent reduction is similar to the effect of reducing one's mortgage rate by half a percentage point.
The announced reduction comes less than a month after Congress refused to fund another administration initiative that would have allowed FHA borrowers who took part in a homebuyer education and counseling program to reduce their annual premium by a quarter percent. That initiative, Homeowners Armed with Knowledge (HAWK) also would have given them a half-percentage point reduction in the 1.75 percent upfront premium charged on FHA loans as well; that fee is untouched by Obama's announcement.
Welcomed by housing industry
The move was welcomed by many in the industry and housing advocates, including the Mortgage Bankers Association (MBA), the National Association of Homebuilders (NAHB) and the Urban Institute, whose researchers had recently called for such a reduction.
MBA Chair Bill Cosgrove, an independent mortgage banker for whom FHA loans make up a large portion of his business, said he expected the reduced premium will provide a significan benefit to his customers and the housing market in general.
"Specifically, this will help first time homebuyers by making FHA loans more affordable," Cosgrove said. "Given the timing, just as we begin the spring home buying season, I think today's announcement is just what the market needs."
Kevin Kelly, chair of the NAHB, echoed Cosgrove's remarks.
"Lower premiums will make home loans more affordable for qualified borrowers, particularly first-time buyers, and help to alleviate tight credit conditions in the mortgage market," Kelly said. "This prudent course reflects a recent actuarial report that FHA is back in black and strengthening its financial health."
Questions over capital reserve
Critics of the action, including many Republicans, cited FHA finances as a reason for opposing it. While no longer insolvent, the FHA currently maintains a capital reserve of only 0.41 percent of obligations, compared to the congressional mandate of 2 percent. House Financial Services Committee Chair Jeb Hensarling, R-Texas, called the reduction irresponsible.
"It was just two years ago that taxpayers had to bail out the FHA to the tune of $1.7 billion, and just two months ago an audit revealed that FHA is still in violation of federal law because it does not maintain sufficient capital reserves," Hensarling said. "Lowering premiums now would only put the FHA further behind."
Current projections are that the FHA reserve will meet the 2 percent level in 2016.
More equal footing with Fannie, Freddie
The fee reduction comes shortly after Fannie Mae and Freddie Mac, currently under government oversight, announced that they were reducing their minimum down payment requirement on mortgages they back to 3 percent. That undercuts the FHA's 3.5 percent minimum, previously the lowest down payment generally available to the public (the VA allows no-money-down mortgages up to a certain value).
Because Fannie Mae and Freddie Mac have lower upfront fees, the mortgage insurance premiums put FHA loans at a disadvantage. The reduction in the annual insurance premium puts it more in line with what private mortgage insurance charges on Fannie Mae and Freddie Mac loans with less than 20 percent down.
The FHA offers less stringent credit requirements than Fannie Mae and Freddie Mac, and its loans are more readily available to borrowers with lower credit scores. For a mortgage with 5 percent down or less, it's estimated that the premium reduction will give the FHA a pricing advantage for borrowers with credit scores below 720; prior to the reduction, that cutoff was around 680.