BLOG VIEW: In an unexpected decision, the outgoing Obama administration has announced a 0.25% reduction in the Federal Housing Administration’s (FHA) annual mortgage insurance premium (MIP) – enough to save borrowers an average of $500 a year, according to the U.S. Department of Housing and Urban Development (HUD).
The big question is, what happens next with government-controlled fees and charges? Will the incoming Trump administration push for a series of mortgage cost reductions? By doing so, the new administration could offset rising interest rates by lowering the fees it controls. The result would be a big plus for both buyers (who want loans) and sellers (who want buyers who can afford their properties).
“A stronger housing sector means more jobs and a stronger economy – something every administration favors,” says Rick Sharga, executive vice president at Ten-X.com, an online real estate marketplace. “A lower FHA premium makes homes more affordable. More affordability translates into more home sales and additional loan originations, as we saw with the FHA’s 2015 premium cut.”
The FHA cut
In a November news conference, HUD officials plainly pushed back against the idea of an FHA premium cut, despite the benefits such a reduction could potentially produce. Two years ago – in January 2015 – HUD slashed the FHA annual MIP by .50%, and loan endorsements increased by almost 330,000 units during the fiscal year.
What’s surprising about the January FHA premium cut is that it wasn’t announced earlier, say, before the elections. HUD officials had to know that the program was doing tremendously well because just a week after the Trump victory, they announced that the FHA reserves had increased by $3.8 billion. Also, although Congress requires a capital ratio of 2.0%, the FHA account actually reached 2.32%.
With the election, over-management of the housing sector is changing. The incoming Trump administration, not bound by the November press conference, can have an easy political victory by announcing lower FHA costs. The outgoing Obama administration, seeing the writing on the wall, no doubt sees the political advantage that could be derived from an FHA premium cut and reversed its November position.
More Trump cuts in 2017?
With a Trump presidency coming to Washington, the obvious question is what comes next. Do further cuts loom ahead?
There is room for such cuts. For instance, the FHA’s annual MIP could be reduced another .10% and go down to .50%, the rate in place in 2008. The FHA’s upfront MIP, now at 1.75%, could potentially fall back to the rate seen in 2010, which was 1.00%. For someone who borrows $150,000, the savings could amount to $1,125 at closing, plus about $150 during the year.
It’s not just the FHA program that could see reductions. The Veterans Affairs (VA) backs financing for veterans with zero down; however, such loans require a 2.15% funding fee, a fee that could be reduced. (Unlike the FHA, the VA does not have an annual insurance cost.)
Another approach would be to cut Fannie Mae and Freddie Mac guarantee fees (g-fees), a kind of insurance charge paid by lenders. This is a very malleable fee because it can be used to do more than underwrite Fannie Mae and Freddie Mac. For instance, under the Temporary Payroll Tax Cut Continuation Act of 2011, Fannie Mae and Freddie Mac were required by Congress to charge an additional 10 basis points on the loans they bought through the end of 2012 – money that was turned over to the Treasury. In other words, a tax by another name.
According to the Federal Housing Finance Agency, “During the five-year period from 2011 to 2015, fees had more than doubled, from 26 basis points to 59 basis points.” The increase was a result of the mortgage meltdown and the enormous losses and liabilities it created.
But with rising home values, can g-fees be reduced?
On Jan. 9, the day the FHA cut was announced, the U.S. Mortgage Insurers – an association representing private mortgage insurers, insurers who compete with the FHA program – said that g-fees should also be cut.
“Arbitrary reductions to the FHA’s MIP is bad policy,” say the private mortgage insurers, “because it pulls borrowers who would otherwise be served by the conventional Fannie Mae and Freddie Mac market, which is backed by private mortgage insurance for first losses versus the taxpayer. Taxpayers are currently exposed to $1.3 trillion in mortgage risk outstanding at FHA. As a result, and unless Fannie Mae and Freddie Mac make commensurate fee adjustments to reflect the FHA decision, the government will likely assume increased amounts of mortgage credit risk.”
Is it realistic to believe we might see more fee cuts in 2017? If home prices and mortgage rates keep rising, lower fees can offset such hikes and help maintain affordability – attractive goals for any administration.
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Ten-X. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.