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Everything you need to know about President Obama lowering FHA premiums

Actual effect of controversial move sparks disagreement

Speaking at a Phoenix high school Thursday morning, President Obama said he is directing the Federal Housing Administration to reduce annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%.

The move, first reported by HousingWire Wednesday, comes despite concerns from the other side of the aisle over its effectiveness whether it would affect FHA's fiscal standing.

“The thing I’m going to be announcing today is a new policy in which the fees that are charged by the FHA for loans are going to be reduced and could save a family like this, one that’s buying through FHA a home, could save them as much as $900 a year, which obviously makes a big difference if their payment is $900 a month,” Obama said. “It could be a full month’s payment that they’re saving, and that could make all the difference for a family that is owning its first home.” 

Obama also said that he believes the move will have major impact.

“…(T)his is going to potentially have an impact over millions of families all across the country.  It should help further accelerate growth in the housing market and stabilizing prices in areas like Arizona that have a long way to come back.  And it’s just one more example of the kinds of steps that we can take to build on the progress that’s already been made,” he said. “Housing has come back, but we can do even better."

Zillow released an independent breakdown of what a 50 bps reduction would mean for first-time homebuyers. However, the announcement is being received with sharply divided opinions on its ultimate effectiveness.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said he thinks it is irresponsible to lower FHA mortgage insurance premiums.

 “Such an action by the President would be a grave mistake that will end up hurting hardworking taxpayers.  It was just two years ago that taxpayers had to bail out the FHA to the tune of $1.7 billion, and just two months ago an audit revealed that FHA is still in violation of federal law because it does not maintain sufficient capital reserves,” Hensarling said. “Lowering premiums now would only put the FHA further behind. 

“A fiscally sound FHA, with a clearly defined mission, ensures homeownership opportunities for creditworthy first-time homebuyers and low-income families.  Any effort to lower FHA premiums would be counterproductive to achieving these goals and would place the U.S. taxpayer at greater risk,” he said.

“The American people want an end to the destructive cycle of boom, bust and bailout that poor decisions in Washington produce.  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,” he said. “The Financial Services Committee is already planning to bring (HUD) Secretary Castro before our members to question him about the poor financial condition of FHA, which President Obama is apparently about to make even worse.”

Hensarling said the move would also push the housing market closer to another bust, even as it struggles to recover. Congresswoman Maxine Waters (D-CA), Ranking Member of the Financial Services Committee, however praised the action as critical for the nation’s homebuyers.

"Although Republicans will roundly criticize this move, it’s important to remember that FHA is far from bankrupt, holding approximately $40 billion in reserves and continuing to generate revenue," Waters said.

"Moreover, it has taken critical steps to recover its capital reserves, and is projected to show a positive balance in 2015. And while this announcement signals that we are moving in the right direction, we still have more work to do to expand access to credit to more low-to-moderate income and minority families," she added.

Housing experts also took to twitter to debate the power of the decision, along with HousingWire Executive Editor Jacob Gaffney:




As to whether Congress will approve the change, Sterne Agee analyst Jay McCanless says is skeptical.

“We do not have an estimate of how long it might take Congress to approve such a change, and we would estimate the probabilities at 50/50 of it occurring. One media source indicated the President could take executive action to force the change, but we cannot verify that as accurate,” he writes. “Today's media speculation does not alter our view on this issue because we believe this change in the FHA insurance rate does not affect the risk calculus for originators.”

He is also skeptical that such a move will have the impact on housing that the White House claims.

“Such a change would be marginally beneficial for the average borrower, in our opinion, and consequently, we do not believe this news, if it proves true, is a catalyst for higher housing demand and higher earnings estimates,” McCanless says. “We estimate the riskiest mortgage borrowers would save about $25/month on their mortgage payment with smaller savings for more creditworthy borrowers. This savings will pull some marginal borrowers into homeownership, but it isn't enough, in our view, to assume single family housing demand increases above our current assumption of 15.0% single family starts growth in 2015.”

Housing & Urban Development Secretary Julián Castro, who was in Phoenix Thursday at the announcement, said that the new premium level is fully consistent with the FHA’s commitment to strengthening its financial health through growing reserves. At the same time, full documentation and continued strong underwriting means lending will remain prudent and sustainable – benefitting both homeowners and FHA.

 “This step is part of the President’s broader effort to expand responsible lending to creditworthy borrowers and increase access to sustainable rental housing for families not ready or wanting to buy a home,” a statement from HUD reads. “In the coming months, the Administration will take additional steps to cut red tape and clarify lending standards to build on the measures announced this week. And the Administration will continue to urge bipartisan progress in Congress to pass comprehensive housing finance reform legislation that will secure a stable and resilient housing finance system – one that will ensure broad access to mortgages at affordable rates and better serve future generations.”

The Mortgage Bankers Association was quick to support the announcement.

“MBA applauds President Obama and his administration for continuing to look for ways to help first time home buyers, grow the housing market and strengthen the economy. Specifically, MBA is pleased about the decision to make a 50 basis point reduction on the annual FHA MIP, something MBA has called for in the past.  This is a win-win,” said David Stevens, president and CEO of the MBA. “It’s good for borrowers and good for FHA, helping the agency stabilize its market share and continue to rebuild the MMI fund.

“Additionally, we were encouraged that President Obama called for GSE reform, which hopefully will spur action on Capitol Hill.  And the coming changes to Fannie and Freddie's rep and warrant framework that he mentioned should help lessen the high level of uncertainty lenders face and allow them to use the full extent of the GSE credit box to serve more qualified borrowers,” Stevens said.

Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business at Arizona State University, said he supports the White House move.

“I think the change in mortgage insurance premiums for FHA loans is a step in the right direction. We need to stimulate a little more demand, but not so much that it overwhelms the already tight supply. I think this will help the first-time home buyer segment, which is where demand needs to grow most,” Orr said. “There are those who think any step to increase access to home loans is potentially setting us up for another bubble. I completely disagree. We are a very long way from the situation that prevailed in 2004, and some prudent increase in loan availability would be a very positive step right now.”

The Community Home Lenders Association, one of the more vocal associations calling for premium reductions, likewise supported today’s announcement. 

“The Community Home Lenders Association commends the President for announcing that FHA will be reducing the annual premiums it charges by 50 basis points,” said Scott Olson, Executive Director of CHLA.  “As we noted when we first called for a reduction almost a year ago, this is a big step in making mortgage loans more affordable and helping more qualified borrowers buy a home. ” 

Affordable housing advocates also applauded the move. 

“We applaud President Obama for this positive step, which will be beneficial to working families striving to climb the economic ladder. Throughout its history, FHA has played a key role in helping working people to access homeownership and build wealth through equity,” said National Community Reinvestment Coalition’s President and CEO John Taylor. “This reduction in FHA mortgage insurance premiums will serve to help make homeownership more affordable and attainable for many families. We are pleased that the administration is showing a commitment to homeownership opportunity.”

But Taylor was critical of the administration’s inaction on other housing policies. 

“Unfortunately, the administration has not yet eliminated the requirement that most FHA borrowers pay for mortgage insurance for the life of the loan. Typically for conventional loans, when borrowers reach a 20% equity threshold, they have the ability to cancel their mortgage insurance. For most FHA borrowers, this option does not exist,” Taylor said. “This unfair policy for FHA borrowers ultimately amounts to a poor tax. We call on the administration to end this recent practice.”

U.S. Rep. Maxine Waters, D-Calif., likewise supported the White House.

“I commend President Obama and Secretary Castro for taking action to provide much-needed mortgage relief to millions of families looking to purchase a home, while also enabling homeowners to save millions of dollars in mortgage payments over the years to come,” Waters said.

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