How Will Killing FHA Insurance Rollback Affect Borrowers?
Less than an hour after being sworn in as president, Donald Trump signed his first executive order, eliminating a drop in FHA mortgage insurance premiums that was to take effect a week later.
If the rate reduction had stayed in place, the average borrower with a $200,000 mortgage backed by the Federal Housing Administration would have had their mortgage insurance drop by about $500 per year.
The National Association of Realtors estimates that 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new homebuyers will be left on the sidelines in 2017 without the cut.
The FHA doesn’t issue home loans, but insures mortgages and collects fees from borrowers to pay lenders if a homeowner defaults on the loan. The FHA guarantees about 18 percent of all mortgages across the country.
They’re most often used by lower-income, first-time homebuyers, sometimes with low credit scores. The FHA-backed loans require low down payments of 3.5 percent, and allow people with high debt ratios to buy a home.
With mortgage rates rising recently, the Obama administration announced on Jan. 9 a reduction in annual premiums for mortgage insurance for FHA loans from 0.85 percent to 0.60 percent of the loan balance, effective Jan. 27. The premiums are paid monthly.
Some buyers lower expectations
The quarter of a percentage point drop didn’t go into effect because Trump ordered it eliminated. Still, some FHA borrowers were expecting the price drop and budgeting for it in the homes they shopped for, says Joseph Murphy, a Coldwell Banker real estate agent in Bradenton, FL.
Murphy says he’s had a few FHA clients lower their purchasing power with the elimination of the mortgage insurance cut, with one pulling out of buying a $135,000 home and instead dropping down to a $125,000 home because the FHA policy wasn’t changed to give them more money. Another client had to drop from a $200,000 home to a $190,000 one, he says.
“It’s not a big difference,” Murphy says. “But it’s enough of a difference. It’s demoralizing for some customers.”
In some neighborhoods he works with, it’s the difference between a barely hospitable home and a home in a better area.
It’s incorrect to say that Trump’s order raised mortgage bills, because it hadn’t taken effect yet anyway when the new president signed it, says Robyn Porter, a Realtor at W.C. & A.N. Miller in Bethesda, Md.
“The FHA insurance rate cut that was recently eliminated should have no impact on buyers,” Porter says. “In fact, the current insurance rates were established under the Obama administration and were the highest rates in more than 10 years.
“So, when Trump eliminated the reduction, they were simply put back to the same rate they had been for years ever since the Obama administration added them in,” she says.
Borrowers with low incomes, middle-of-the-road credit scores or have less than a 20 percent down payment are the main users of FHA loans. “These are typically more at-risk buyers for default,” Murphy says.
“Anything that makes access to money more expensive is going to have an impact, especially for fringe buyers,” he says.
Wealthier buyers either don’t qualify for the program or can bet a better loan rate on a conventional loan if they have good credit.
While it’s a great program for people who need it, not getting a $500 or so cut in FHA mortgage insurance shouldn’t affect buyers, Porter says.
“This is not going to deter somebody from buying a house,” she says.
Not getting a monthly mortgage insurance break of $50 or so per month shouldn’t be the difference in buying a home, she says.
“If that is going to break your bank, you shouldn’t be buying a home,” Porter says.
The overall impact may not be much, but even keeping the FHA rates where they were tends to make borrowing more expensive, increase housing prices and could drive some people away from buying a home, says David Reiss, who teaches about residential real estate at Brooklyn Law School.
“Everything has a marginal impact,” Reiss says.
“The more general point, though, is that FHA premiums have gone up significantly since the beginning of the financial crisis,” he says. “The Trump administration will need to think through the extent to which it wants to support homeownership and how it would do so.”
Low-income areas could be hurt more
In low-income areas where FHA-backed loans are common, pulling back the FHA premium rollback could affect more people, especially if they’ve bought homes that cost more than the average FHA-backed mortgage costs.
Its biggest effect was in California, where the insurance change would have led to an average of $860 in savings per year, according to the California Association of Realtors.
For home buyers on the fringe of affordability, the policy reversal may be enough to drop them out of the housing market.
“I was surprised for Trump to do it because he’s a real estate guy,” said Coldwell Banker's Murphy.
For the millions of Americans that the FHA has made homeownership possible for, even a $50 monthly drop can make a home affordable, says Bruce Ailion, a Realtor at RE/MAX Town and Country in Atlanta.
Ailion says he’s seen buyers break down in tears of happiness at FHA closings, and this policy change will lead to fewer loans being made.
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