This week, consumers looking to buy a home in 2017 using the popular FHA loan program got a bit of good news. On January 9, U.S. Housing and Urban Development Secretary Julián Castro announced that the Federal Housing Administration (FHA) will reduce its mortgage insurance premiums pay by a quarter of a percent per year. That change brings the amount each borrower pays to insure the loan when they put less than 20% down to 0.60% of the value of the mortgage, down from the previous 0.85%. It will affect most FHA mortgages funded on or after January 27, 2017.
While a drop of 25 “basis points” might seem minor, it could save borrowers a significant sum, especially in the first few years of the mortgage when they’re paying mortgage insurance before they’ve accrued the necessary equity to forgo such insurance. According to Castro, the new lowered rates are projected to save new FHA borrowers an average of $500 this year.
It’s important to note that number is based on the average borrower in the U.S., taking out a 30-year fixed rate $200,000 mortgage, amounting to the $500 expected savings. But for higher priced mortgages, such as we find in most of California, the savings will be even more profound. The HUD Secretary expects the mortgage insurance re-pricing to help about one million borrowers this year, saving them an aggregate half a billion dollars.
The FHA mortgage insurance premium decrease is also great news considering that interest rates have been on the rise, jumping about 66 basis points since the November election. The FHA savings could help offset a slightly higher interest rate for many borrowers.
Not that we’re looking a gift horse in the mouth, but why is the FHA lowering its mortgage premiums now?
“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” said Castro as he briefed the press. “This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers.”
The reality is that the rate has been lowered as the FHA achieves a state of normalization and health once again, marking four straight very profitable years since faltering during the aftershocks of the mortgage meltdown and recession. The new premiums of 0.60% will be in the same neighborhood as the 0.55% the FHA charged before the housing crash in 2008, according to the FHA.
Just like Fannie Mae and Freddie Mac, the FHA doesn’t actually lend money orissue mortgages but is a private organization that insures loans. Therefore, Congress mandates that the FHA always has enough reserves to cover projected losses over 30 years. When borrowers pay these mortgage insurance premiums, they’re helping stockpile the FHA’s Mutual Mortgage Insurance Fund, which protects the agency against losses when borrowers foreclose or default.
Therefore, the FHA’s Mutual Mortgage Insurance Fund faced a serious shortfall in 2013, as a result of mounting losses due to the financial crisis. The agency received a cash bailout of $1.7 billion just to keep its doors open.
But with the real estate marketing recovering soundly since then, the FHA has regained its financial footing. In fact, the FHA has gained $44 billion in value since 2012, spurring the mortgage insurer to lower premiums to normal levels.
While this premium drop is welcomed, it’s not the first, as FHA cut premiums 50 basis points in January 2015 for the same reason. Both are moves that they hope will make FHA loans even more popular for borrowers, who have flocked to FHA loans since the financial crisis as banks got more conservative and tightened their lending standards.
FHA allows borrowers to take out mortgages with down payments as low as 3.5%, not the traditional 20% with conventional loans, and also serves borrowers with credit scores as low as 580 in some cases. For those reasons, FHA has become ultra-popular with first-time homebuyers and younger buyers, and these days, about 20% of all mortgages are FHA loans.
But will the FHA premium reduction really help? Many analysts hold the opinion that lending and the housing market have a lot bigger problems that need to be fixed before we celebrate the FHA’s drop-in-the-bucket price decrease.
“I’m not quite sure how much it actually does,” said Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center in an interview with MarketWatch. “When you look at opening the credit box, there are other actions like figuring out how to break down the False Claims Act so lenders aren’t running scared of more risky loans. That seems to me would have been more effective in terms of access to credit.”
In fact, many banks choose not to offer the FHA program to potential borrowers as the agency started issuing heavy fines for minor infractions of FHA program rules – part of the governmental push to restrict reckless and unregulated lending that contributed to the 2007 mortgage collapse.
But FHA and government housing officials are optimistic that the insurer’s premium drop is the right move at the right time.
“We’ve carefully weighed the risks associated with lower premiums with our historic mission to provide safe and sustainable mortgage financing to responsible homebuyers,” says 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.”
We expect the FHA’s announcement that they will drop insurance premiums to save borrowers in Sacramento and California a significant amount of money, making FHA loan programs more attractive than ever for homebuyers.
Contact us if you’d like to get more details on rates and pricing and to see if you qualify!