With 2017 barely underway, we are already seeing the effects of government changes on the real estate market! As one of his first actions as president, Donald Trump has suspended the fee cut on Federal Housing Administration (FHA) mortgage loans. The premium reduction was one of the last efforts of the Obama administration, which would have taken effect on January 27th. Borrowers pay this annual premium when they take out a home loan backed by the government.
What would the reduced premium have done?
Announced by the Department of Housing and Urban Development (HUD) on January 9th, the rate cut would have reduced premiums by a quarter of a percentage point. The FHA estimated that this would have saved a homeowner approximately $500 on average this year. The hope was that the reduction would attract more first-time homebuyers, as it would have made getting a mortgage loan more affordable. Since mortgage rates have been on the rise, this cut was perceived as a positive change for many.
While Obama was in office, the FHA premiums actually increased four times from 2010-2013 before a taxpayer bailout of $1.7 billion was necessary. This new policy would have brought it back down to just about where it was when Obama became president. The Obama administration claimed that the FHA could handle the cuts as its financial status has been steadily improving since the bailout. In fact, former HUD Secretary Julian Castro said, “With sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families.”
Why did the Trump administration halt the cut?
Some Republicans challenged the idea of the premium cut, stating that the FHA was still not financially secure enough to withstand the cuts. It only just regained the necessary 2% capital reserves in the 2015 fiscal year. Generally, government-funded loan applicants have a riskier credit history, which is one reason why banks have been leaving the FHA market and non-bank lenders have been taking their place. Another reason is that the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act has made the process of vetting loan applicants a more tedious process. In addition, while the proposed cut might have helped those looking to the FHA for a loan, it might have meant additional risks and costs for other homebuyers and taxpayers.
After suspending the fee reduction, the Trump administration penned a letter to those in the real estate industry. In the letter, HUD explained that it needed to do more research and analysis into the market before allowing any changes to be made to mortgage insurance premiums. Due to the potential risks involved, HUD decided to take a step back and look deeper into the situation. That said, it is possible that the policy could be revisited in the future.
What does that mean for prospective FHA loan applicants?
Luckily, since the policy had not yet gone into effect, no one was actually affected by this decision. Those who had expected to take advantage of the reduced premium might be disappointed, but nothing will change for any contracts that are already in process. Be sure to keep an eye out for any news regarding the government’s status on this policy, as well as other real estate-related topics. It will be interesting to see how the market will continue to change as we dive further into 2017.
