Blocked FHA Mortgage Insurance Cut

by Steve Meyers

January 28th, 2017

The new Trump Administration halted the previously announced FHA mortgage insurance rate cut from 0.85% to 0.60%.  What does this all mean?  Let me give you a little historical perspective and then discuss the Pros and Cons.

One of the missions of the FHA (Federal Housing Authority) is to provide mortgage insurance on loans to low and moderate income families with modest credit scores, to allow them the opportunity to purchase homes.  These families can borrow up to 96.5% of a homes’ value and have a credit score of 580.  Mortgage loans greater than 80% of the purchase price require either FHA mortgage insurance or mortgage insurance from a private company like MGIC before they can be bundled and sold on the Capital Markets.

Following the housing bust in 2008, the FHA experienced an unexpected number of borrowers who went into default and they ultimately had to foreclose on their loans.  The FHA’s capital reserved of 2.0% of their entire portfolio, as required by congress, was severely diminished.  The Obama Administration raised the FHA’s mortgage interest rate 4 times since 2010 to increase the capital reserves back to its’ required 2.0%.  To help the Agency, the Federal Government had to infuse 1.7 billion dollars into the Agency in 2013.  That was the only time in the 79 year history of the FHA that Congress had to bail out the Agency.  In fiscal 2015, the FHA finally reached its’ required reserve of 2.0% of its’ portfolio.

In late 2016, the Obama Administration made the decision to reduce the current FHA mortgage interest rate from 0.85% to 0.60% to allow more low and moderate home buyers to purchase homes and, to reduce the monthly insurance payments for over 700,000 existing borrowers by 0.25% of their outstanding loan amounts.

So, what is the biggest advantage in halting the announced plan to reduce the mortgage interest rate?  Housing prices throughout the country are growing at historically higher rates than normal.  This cannot continue and there is sure to be a correction in the market.  If the FHA reduces their mortgage insurance rates and the bubble bursts again as it did in 2008, the FHA should increase its’ capital reserves today so Congress does not have to bail it out for its’ second time in a decade.

What are some of the disadvantages in halting the reduction of the mortgage interest rate?  As mentioned earlier, roughly 700,000 current home owners will not receive a reduction in their interest rates and between 30,000 and 40,000 potential new home buyers will not qualify to purchase a home.

If you have any comments or questions about this article, please email me at smeyers@kw.com.

Steve Meyers is a Managing Broker at Keller Williams Real Estate in Seattle, Washington.  He can be reached at (206) 972-3328 or smeyers@kw.com.

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