In a surprise move on January 9, the Obama administration announced a reduction to the monthly mortgage insurance (MI) on all FHA loans. For loans that close on or after January 27, 2017, most homebuyers will pay .25% less per year in MI on their loan.
Will Trump take it away?
The timing is, of course, interesting. Given that the reduction is scheduled to take effect exactly a week after the inauguration, Ben Carson, Trump’s nominee for Secretary of the Department of Housing and Urban Development, will have the opportunity to cancel the cut if he sees fit. During his confirmation hearing last Thursday, when asked how he felt about this “parting gift” to home buyers, Carson said that he plans to “really examine” it. (Perhaps with a stethoscope?)
My hunch is that the cut will stand. In HUD’s press release, Julian Castro, the outgoing Secretary of HUD, said: “After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families.” For Trump to be seen, during his first week in office no less, as increasing mortgage costs for middle class homebuyers seems unlikely. Whatever else he is about, he has spent most of his life as a real estate guy. But predictable he is not, and Carson is a retired brain surgeon with no political track record to lend insight as to what his agenda at HUD will look like. So we’ll just have to wait and see.
Less MI means more buying power
Assuming the reduction sticks homebuyer stand to benefit. In Portland, buyer purchasing a median priced home of $345,500 and putting down the FHA minimum of 3.5% will see a reduction of $69 per month during their first year of payments (from $234 per month at the current rate of .85% to $165.17 per month at the new rate of .6%). Not bad.
And because, for most buyers, FHA mortgage insurance runs for the full life of the loan, .25% annual savings could add up to as much as 7.5% of the loan amount in aggregate savings over 30 years. That’s real money.
Given the state of the Portland market, perhaps the more exciting difference comes in the form of increased buying power. Once the change takes effect, the old payment on a $345,500 home will equal the new payment on a $358,500 home. Yup, $13,000, more house for the same monthly payment.
And a little history (because I can’t help myself)
Last week’s cut was the second in two years, bringing premiums to within .05% of their pre-housing-crisis levels.
The period of much higher premiums from 2010 until now was a direct result of the loses HUD sustained due to defaults during the mortgage crisis. In the deepest, darkest moments of the financial crisis, FHA played a huge role in propping up the sagging housing market. In 2010, believe it or not, one in every three purchases was financed with an FHA loan.
The outsized role that the FHA program during this time was a feature, not a bug. FHA was, after all, formed in 1934 during the Great Depression to create liquidity during a time when banks were struggling and would not lend on homes. (Sound familiar?) With housing back on track, FHA is insuring fewer loans. And with defaults on insured loans down, FHA can go back to charging lower MI premiums to today’s borrowers and still maintain necessary liquidity.