DSNews Author: Tory Barringer January 7, 2015
Bloomberg first reported Wednesday that FHA will cut its mortgage insurance premiums to 0.85 percent, a 0.5 percentage point reduction. President Obama was expected to make the announcement on Thursday in a scheduled speech on the housing market in Phoenix, but the White House made it official following initial media reports.
FHA raised premiums in response to its declining mortgage insurance fund, which forced the agency to take a $1.7 billion bailout in 2013. Since then, it has rebuilt its capital, spurring some commentators to call for a cut.
In a statement, the White House estimated that the reduction will translate to a $900 decrease in annual mortgage payments for first-time buyers, with existing homebuyers expected to see similar savings.
“This step is part of the President’s broader effort to expand responsible lending to creditworthy borrowers and increase access to sustainable rental housing for families not ready or wanting to buy a home,” the statement reads, adding that the Obama administration “will be taking additional steps to cut red tape and clarify lending standards” in the coming months.
In a separate statement, HUD Secretary Julián Castro said the change will make homeownership more affordable for millions of Americans in the next three years.
“By bringing our premiums down, we’re helping folks lift themselves up so they can open new doors of opportunity and strengthen their financial futures,” Castro said.
The announcement is welcome news to many of housing’s biggest trade organizations, who have been vocal in the past few months about the consequences of higher premiums.
In a statement to DSNews, Chris Polychron, president of the National Association of Realtors (NAR), said the group is hopeful at the rumor, adding that current premiums “have priced too many potential home owners out of the market.” NAR estimates that in 2014 alone, nearly 234,000 creditworthy borrowers were priced out of the housing market because of high FHA premiums.
“By lowering its fees, FHA will provide greater access to homeownership for historically underserved groups,” Polychron said. “I look forward to attending the speech … and sharing our views with President Obama.”
Housing analysts have also joined the rising chorus of those urging for lower premiums. In a report put out before Wednesday’s announcement, researchers Laurie Goodman, Bing Bai, and Jun Zhu at the Urban Institute argue that FHA could still net at least $2 billion in 2015 with premiums as low as 0.9 percent annually, allowing the agency to continue rebuilding its insurance fund.
“It makes sense to make up the shortfall more slowly, pricing new business more appropriately for the risk,” the group said. “Thus, rather than attempting to make $5.7–$6.8 billion with its 2015 book of business … it would serve the FHA better to lower the premiums and achieve the reserve at a more gradual pace.”
Still, the move is bound to attract some measure of criticism, particularly among Republicans and analysts who say FHA is setting itself up for another disaster. In an interview with DSNews in November, Edward Pinto, co-director and chief risk officer of the American Enterprise Institute’s International Center on Housing Risk, said it would be a bad course of action for the agency to bring premiums down, especially as it continues to engage in what he said are risky lending practices.
“Since FHA’s financial future is still uncertain, now is not the time to reduce premiums. It has nowhere near the level of reserves to withstand even a minor recession,” Pinto said. “Given FHA’s current high risk practices, it would be imprudent to not stay the course; it should not lower premiums.”