Less than an hour after President Donald Trump was sworn into office it was announced that the Department of Housing and Urban Development (HUD) had suspended the previously announced Federal Housing Administration (FHA) insurance rate cut that was to take effect on Jan. 27.
The reversal is one of the first actions the Trump Administration has taken as part of an overall effort to undue some of the policy actions taken by the Obama Administration.
On Jan. 9, the FHA announced that it was reducing annual premiums for most borrowers by 0.25%. The rate cut would have saved a borrower with a $200,000 mortgage about $500 this year.
Most people in the mortgage and housing industries supported the rate cut, saying that it would help offset rising interest rates.
However, some Republican policymakers, including Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, who has been very active in the development of housing regulation reform proposals in recent years, said the rate cut was risky because it increased the possibility that the FHA would need another taxpayer bailout in the event there is another economic downturn like the one that began in 2008.
Ben Carson, President Trump’s pick as the new HUD secretary, said earlier this week that he would “really examine” the rate cut, but did not go so far as to say the cut would be repealed or postponed.
One of the fundamental problems with the proposed cut, Carson said, was that the Obama administration had failed to provide a thorough analysis as to what the impact would be on the FHA’s Mutual Mortgage Insurance Fund (MMIF).
Following the financial crisis that began in 2008, the MMIF went into the red, due primarily to borrowers defaulting on their FHA-backed mortgages but also due to losses in the FHA’s reverse mortgage (HECM) program. In 2013, after the fund dipped to below its mandated reserve level of 2%, the FHA requested – and was granted – a $1.7 billion infusion of capital from the U.S. Treasury in order to shore up its reserves. It was the first government bailout of the FHA in the agency’s 80-year history.
Since then, the FHA has been implementing a variety of fiscal measures to bolster its reserves to above the 2% threshold mandated under the Federal Credit Reform Act, including raising premiums and stemming losses in its HECM program. According to an independent actuarial report released in November, the fund grew by $3.8 billion during the 12 months ended Sept. 30, 2016, and stood at 2.32%, up from 2.07% in 2015.
Following the release of the actualial report, many housing industry and mortgage experts said it would be an opportune time for the FHA to once again reduce its insurance premiums so as to stimulate more home buying. The last time it cut premiums was in January 2015, when the Obama Administration directed the FHA to cut rates by 50 basis points, from 1.35% to 0.85%.
In its Jan. 9 announcement, the FHA said the fund had gained $44 billion in value during the four fiscal years ended Sept. 30 – and that it was time to pass some of that on to consumers.
The decrease from 0.85% to 0.60% “comes at the right time for consumers who are facing higher credit costs as mortgage interest rates are increasing,” the FHA said in a release.
“We’ve carefully weighed the risks associated with lower premiums, with our historic mission to provide safe and sustainable mortgage financing to responsible home buyers,” said Ed Golding, principal deputy assistant secretary for HUD’s office of housing. “Homeownership is the way most middle-class Americans build wealth and achieve financial security for themselves and their families. This conservative reduction in our premium rates is an appropriate measure to support them on their path to the American dream.”
Some people in the mortgage industry had pointed out that – at about $500 per year – FHA borrowers would not have benefited that much from the rate cut.
The announcement came in a mortgagee letter signed by Deputy Assistant Secretary for Housing Genger Charles, which said the cut would be “suspended indefinitely.”
However, as of press time, news of the reversal was yet to be announced on HUD’s website.
In a statement, David H. Stevens, president and CEO of the Mortgage Bankers Association, who has previously expressed support for the rate cut, said although the MBA recognizes “the Administration’s need to examine the overall health of the insurance program and weigh that against the benefits of lowering mortgage insurance premiums … lenders have already started preparing for the MIP decrease.”
“It is important that any new policy be implemented in a way that minimizes disruption for borrowers and lenders,” Stevens said. “[The] MBA looks forward to working with the new Administration to ensure the long term stability of the FHA program, creating an environment that provides clarity in regulations for lenders while at the same time promoting access to credit and protecting consumers.”