HUD’s Suspension of FHA MIP Rate Cut: What It Really Means
On Friday, January 20, 2017, the new Administration’s U.S. Department of Housing and Urban Development (HUD) suspended a January 9 announcement by the outgoing Obama Administration’s HUD and its Federal Housing Administration (FHA) regarding a planned reduction in FHA mortgage insurance premiums (MIP) for borrowers. (Note: the FHA is a 100% government-backed mortgage insurance program that, just like private mortgage insurance, guarantees mortgage lenders against default risk particularly for home loans originated with low down payments.)
The FHA MIP reduction was to take effect on January 27. Given the haste of this announcement, the incoming Trump Administration at HUD suspended this decision as to provide incoming officials sufficient time to better understand the potential impact—good and bad—such a reduction would have on the market.
There have been a number of reports and opinions shared on the recent suspension—and not all of them accurate. Below are additional facts and information on the decision to suspend the not-yet implemented premium reduction. We hope you find it helpful. Please don’t hesitate to let us know if you have any follow up questions. Feel free to email us at firstname.lastname@example.org.
1. HUD’s decision does not raise the cost of homeownership in any way. The proposed FHA MIP reduction was announced by outgoing Obama HUD officials on January 9 and was scheduled to take effect on January 27. This proposed 25 basis points (bps) reduction has been suspended and, therefore, means there is no change to FHA premiums for new mortgage originations or refinances FHA mortgages. Since FHA premiums remain the same, the costs of an FHA-backed mortgage do not increase at all.
While some have been quick to criticize HUD’s recent action with politically-charged rhetoric, this is not a political or partisan issue. As noted in a January 24 Washington Post editorial, “the Obama administration itself increased this [FHA] fee four times between 2010 and 2013” before lowering the fee by 50 bps in 2015. The Washington Post goes on to say, “given recent financial instability—both at FHA and in housing generally—the new administration was perfectly justified in undoing it.”
2. With or without an FHA-insured option, there is wide availability today of low down payment mortgages backed by private mortgage insurance. Homebuyers have options; this includes low down payment mortgages with private mortgage insurance (MI). Unlike FHA-backed mortgages, the risk contained in loans guaranteed by private MI is not 100% exposed to the government and taxpayers. Private mortgage insurers put their own capital ahead of taxpayers to back mortgages that help homebuyers qualify for mortgage financing despite a low down payment or imperfect credit.
3. When comparing apples to apples, a low down payment mortgage backed by private MI is a better deal for homebuyers compared to FHA. First, cash for a down payment can be less for a private MI conventional mortgage compared to an FHA loan. Second, private MI can be cancelled thus lowering the monthly bill while FHA premiums generally must be paid for the full life of the mortgage.
In contrast to FHA insurance, private MI can be cancelled once borrowers have established 20% equity (through payments or home price appreciation). Ninety percent of borrowers cancel their private mortgage insurance within the first 60 months (five years). Why pay FHA insurance for another 25 years on a 30-year mortgage if it’s not necessary? The savings over time are significant.
The minimum down payment for FHA is 3.5% while a conventional private MI-backed mortgage can be originated with as little as 3% down. On a $234,900 home purchase (national median in December 2016), with a 4.25% interest rate for conventional and 4% for FHA, the FHA loan requires $1,175 more for down payment than the private MI loan. This goes to show that even with a higher interest rate the conventional loan still may be a better deal.
4. Experts (see below) point out that the FHA was stretched to the brink for nearly a decade, through the financial crisis, ultimately requiring a $1.7 billion taxpayer bailout. These experts argue that the capital levels required of FHA to shield taxpayers against losses, which is a thin 2% to begin with and has been underwater for several years, should not be thinned-out so quickly after it’s been restored back to health.
- Housing policy experts at the Urban Institute debunk some of the quick claims about the negative impact of this HUD action. In a new blog they state: “A close look at the planned price reduction, however, reveals that the impact on the market would have been small and retaining the current price to help shore up FHA funds for a rainy day is a more prudent choice.” They also caution that the new lending volume at FHA would not come from unserved borrowers or homebuyers left on the sidelines, but instead borrowers already served by the low down payment conventional market.
- On the opposite side of the political spectrum, scholars at the American Enterprise Institute (AEI) agree with Urban Institute on the forestalled FHA premium reduction. AEI scholars note that the last time FHA cut fees in 2015 it did not result in serving a new, previously unserved universe of homebuyers. AEI found, “almost half of these buyers— attracted by FHA’s lower monthly payments—were poached from other government agencies, mainly Fannie Mae or Freddie Mac. We also estimate that another third of the 180,000 buyers would have entered the market regardless of the lower premium, because an improving economy was raising incomes and lowering unemployment across the nation.”
5. Given privately insured mortgages are widely available and therefore homebuyers have options beyond FHA, the government program does not need to potentially increase risks to the American taxpayers. Below is a statement by Lindsey Johnson, USMI President and Executive director.
“HUD’s action allows the incoming Administration appropriate time to begin its work and to determine if an FHA mortgage insurance premium reduction is needed, and how it might expose taxpayers to undue risk. Given the wide availability of MI-backed low down payment mortgages and the fact that private MI is a better deal for borrowers over FHA since it can be cancelled, which in turn lowers monthly payments while FHA insurance must be paid for the life of the loan, there is no need for FHA to undercut the private market. While the FHA serves an important role in the housing market, it has expanded its footprint dramatically since the financial crisis and should instead remain focused on its core mission of serving underserved borrowers. USMI has and will continue to work with policymakers and housing officials to establish a more coordinated housing policy that will ensure broad access to low down payment lending while reducing the government’s footprint in housing and protecting taxpayers.”