Written By: Joel Palmer, Op-Ed Writer
President Donald Trump had barely settled into the Oval Office when he reversed an Obama Administration cut on FHA mortgage insurance premiums.
A week before leaving office, President Obama announced a cut in the insurance premium by a quarter of a percentage point, from 0.85 percent to 0.60 percent. President Trump rescinded that move on his first day in office, keeping the insurance premium at 0.85.
In a HUD letter to mortgagees the Federal Housing Administration wrote: “FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers. As such, more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions in an ever-changing global economy that could impact our efforts.”
The administration cited concern about the FHA’s Mutual Mortgage Insurance Fund (MMIF), which absorbs losses on FHA loans. FHA mortgage insurance premiums are funneled into this fund.
Federal law requires the FHA’s capital reserve ratio to remain above 2 percent. It fell below this level following the 2008 financial crisis. In 2013, the MMIF required a $1.7 billion bailout from the U.S. Treasury, the first in 79 years, because of a large number of defaults on FHA loans. To further help replenish the MMIF, the Obama administration raised the FHA mortgage premium rate several times, from 0.55 percent to a high of 1.35 percent.
Two years ago, the Obama administration cut the premium from 1.35 percent to 0.8 percent. That move coincided with the MMIF rising above the 2 percent threshold. HUD announced in November that the fund’s capital ratio had reached 2.32 percent.
Some in the mortgage business believe the wording of the letter indicates that the administration move may be temporary. The hope is that after “more analysis and research” is done, the Trump team will reverse course and reinstitute the Obama administration premium cut.
Some are speculating that Trump’s announcement was simply a way to protest the last-minute nature of the Obama administration cut. Since much of his support came from middle-class voters, the argument goes, Trump will eventually want to provide relief to those homeowners through a premium cut of his own. A cut in FHA mortgage premiums could have helped buyers offset the impact of escalating home values and rising interest rates.
And if Administration officials are confident that its policies will strengthen the economy, it should theoretically be less concerned about mortgage defaults depleting the MMIF.
On the other hand, the premium cut announced by Obama hadn’t taken effect. Therefore, current FHA officials can claim that nobody was adversely affected by the reversal.
Others are pointing out that the premium cut would have had minimal impact on borrowers. It would have reduced the annual premium for a homeowner borrowing $200,000 by $500 in the first year, or roughly $40 a month. The concern is whether it’s worth potentially depleting the MMIF to provide a small benefit to individuals.
With about 22 percent of all mortgages insured by FHA, a move in either direction is sure to have an impact on mortgage processors and mortgage underwriters.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.