FHA premium cut may not be that big of a deal

by Rachel.Norvell08 Jan 2015
Many in the industry have praised the move by the Obama Administration to lower FHA mortgage insurance premiums as a godsend, notating how the action could boost home buying. However, some remain skeptic about how much of an impact the cut will actually have on the housing market.

U.S. President Barack Obama announced Wednesday he will direct the FHA to reduce premiums by 50 basis points to 0.85%. The action is in an effort to help millions of families save billions of dollars in mortgage payments in the coming years, helping to support the housing market recovery, according to a White House statement.

Analyst Jay McCanless of Sterne Agee told MarketWatch the savings equate to a mere $25 a month per $100,000 in a 30-year mortgage, which he added is probably not enough to significantly boost home sales or spur builders to ramp up construction.“Such a change would be marginally beneficial for the average borrower," he said.

Republicans have said premium cuts should be off the table because the agency’s insurance fund remains below the legally required level of 2%. House Financial Services Committee Chairman Jeb Hensarling said last month that “a broke FHA is a broken FHA.”

"If President Obama follows through on today's pledge, he will be increasing the likelihood that taxpayers will have to foot the bill for yet another bailout," Hensarling said in a statement Wednesday.

After the housing bust, the FHA's finances took a hit and in 2013, the agency was forced to draw on $1.7 billion in taxpayer funds for the first time in its history. Since then, FHA has returned in the black, in part because of the higher premiums.

“This sounds like a move in the wrong direction,” said Mark Calabria, director of financial regulation studies at the Cato Institute, told Businessweek.  “FHA has a portfolio of poor quality loans. This will end up costing the taxpayer considerably.”

Marc Savitt, president of the National Association of Independent Housing Professionals, said while the cut is welcomed news it is not enough. "HUD also needs to allow borrowers to drop the monthly insurance premium once the loan reaches 80% LTV, he said. “Lowering the costs associated with FHA financing, will allow more borrowers to qualify and afford the program.”

Mortgage industry celebrates premium cut news

Many in the industry celebrated the news, including Mortgage Bankers Association (MBA) CEO David Stevens. "It couldn't come at a better time," he said. "February is the beginning of the spring market. I think it will have a definitive impact particularly in the first-time homebuyer market."

For the typical FHA applicant, the reduction in premiums means a savings of about $80 on their monthly payment, according to CoreLogic's chief economist, Sam Khater.

"So it's positive news from a consumer welfare perspective, especially for first-time homebuyers, which account for the majority of FHA's business," he told CNBC. "However, I think the marginal impact on sales will be small because potential buyers make the decision to purchase based on trigger events, such as a new job, marriage, kids, etc. Changes in affordability only impact how much home they can buy."

HUD Secretary Julián Castro is optimistic about the impact the cut will make on the housing market.

"This action will make home ownership more affordable for over two million Americans in the next three years," said Castro. "Since 2009, the Obama administration has taken bold steps to reduce risks in the mortgage market and to protect consumers. These efforts have made it possible to take this prudent measure while also ensuring FHA remains on a positive financial trajectory.”

The FHA estimates that 250,000 first-time homebuyers will enter the market after the premium reductions.


  • by Bill S. | 1/8/2015 9:45:56 AM

    Analyst Jay McCanless of Sterne Agee does not know simple math. The MIP on a $100,000 mortgage with 1.35% annual equals $111.64 monthly. At 0.85% it's $70.29. That's a savings of $41.35, not $25. Now look at a $200,000 mortgage and tell me there's no impact!

  • by John The Mortgage Guy | 1/8/2015 9:50:01 AM

    That analyst obviously doesn't understand FHA mortgage insurance. A .5% drop in mortgage is larger than $25 per $100k. It is in fact $41.67 per $100k. Which on homes in many areas can be a savings of well over $150 per month. And not to mention this will also allow people to look at homes that they normally wouldn't be able to based on the old mortgage insurance #'s. All things being equal (taxes etc) potential homeowners increase their buying power, without increasing the payment, by about 7%.

    I say thats a win/win and should help out. With lower FHA mortgage insurance they are now on par with conventional MI rates at the higher LTV's.

  • by brichards513 | 1/8/2015 10:21:07 AM

    The other point that has not been mentioned here is that there will be a significant number of current FHA borrowers who were shut out of a streamline refinance due to the increase in the monthly MIP. With this reduction - there should be plenty of additional streamline clients who didn't qualify the due to the 1.35% MIP in the past. Not to mention the streamline opportunity for even recent buyers who would want to capitalize on the reduction in monthly payment that the lower MIP would allow in conjunction with lower rates that are available now versus 6 to 12 to 18 months ago.


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