Trump Administration’s Indefinite Suspension of FHA’s Pending Premium Cut is Good News for Both First Time Homebuyers and Taxpayers
On January 20, 2017 HUD issued Mortgagee Letter 2017-07 which suspends Mortgagee Letter 2017-01 dated January 9, 2017. Mortgagee Letter 2017-01 would have reduced annual mortgage insurance premiums on home purchase loan by 25bp, with a larger premium reduction for loans in excess of $625,500. Since the premium cut announcement was only a few days old and had not taken effect, the impact of the suspension is minimal. The fact is that little of the price cut goes to expand access to new homebuyers not already intending to purchase.
Good news for first-time homebuyers: Research by the AEI International Center on Housing Risk has demonstrated that implementing a mortgage premium price cut during a seller’s market (defined as <=6 months of homes for sale inventory at current selling rate) does little to expand access to new borrowers. Instead, most of the ensuing volume gain by FHA is due to poaching from Fannie Mae (and privately capitalized mortgage insurers), Rural Housing and other federal guaranty agencies. At the same time, much of the premium cut either gets capitalized into higher home prices for all FHA homebuyers or gets spent by buyers on larger, bigger, or homes in different locations. In short, little of the price cut goes to expand access to new homebuyers not already intending to purchase. With the U.S. now in its 51st month of a seller’s market, it should come a no surprise that home prices have been increasing much more rapidly than incomes or inflation. This is an unsustainable trend.
Good news for taxpayers: Suspending the premium cut will benefit taxpayers, as it will result in additional needed capital accumulation by the FHA. There is general agreement that the current 2% minimum standard is just that, a minimum. For example, in the last session of Congress, both the Senate Banking Committee and the House Financial Services Committee reported out bills that would have raised the minimum to around 4 percent. In HUD’s FY2014 Report to Congress, it cited a similar 4 percent level as a goal. Yet when the FHA last lowered its premium in 2015, the result was to extend the time needed to accumulate 4 percent in capital. Just as important to taxpayers, suspending this price cut may well forestall the usual tit-for-tat responses from the FHA’s tax-payer supported competitors—responses that only serve to fuel a race to the bottom.
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