FHA insurance reduction will boost housing, maybe

Is it truly a major step?

In another attempt to “do good” or better yet, appear to do good, for middle- and lower-middle-class Americans, the Obama Administration is directing, via executive action if necessary, the Federal Housing Administration to reduce annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%, as reported on Jan. 7, by Trey Garrison in HousingWire.

According to the article, a White House statement released to the media stated that, “… (T)oday, the President announced a major new step that his administration is taking to make mortgages more affordable and accessible for creditworthy families.”

Major step? I will grant that it is a step, but it remains to be seen if it comes close to being a “major” step. To punctuate their assertion the statement continues with, “In total, this action will help millions of families save billions of dollars in mortgage payments in the coming years, helping to support the housing market recovery.” The statement makes it sound as if this action will have a noticeable positive impact on the housing market, but many disagree.

When you add up all the savings that might occur through this executive action it certainly could become “billions,” but in reality this action will save families on average about $900.00 per year. That comes out to roughly $75 per month. I’m not disputing the fact that any family could use an extra $75 each month, especially with real inflation of food prices and other necessities, especially health care, continuing to climb. But, Garrison’s article also points out that the riskiest mortgage borrowers would only save about $25 per month.

However, to be fair, $75 savings on one’s monthly payment is still another 18k or so in loan qualification (at current rates)  and purchasing power, which is a big deal for a lot of folks trying to buy their first home. Therefore there is an affordability point here – granted it probably won’t even help as many families as the Administration believes it will.

To that point, also in Garrison’s article, Sterne Agee analyst Jay McCanless says that while many in the housing industry welcome the cut, it won’t have as big an impact on housing as many expect. McCanless is quoted as saying, in part, “… we do not believe this news, if it proves true, is a catalyst for higher housing demand…”, and I concur.

But this action, to a certain extent, makes it appear that the Obama Administration is doing something to help middle-class Americans. And in so doing, since Republicans will no doubt oppose this executive action, because the FHA is not today in a sound position to reduce these premiums (the Mutual Mortgage Insurance Fund is expected to remain below the Congressionally-mandated 2.0% threshold until October 2016), the GOP will again appear to only care about the wealthiest of Americans. While one would hope that this isn’t the real intent, rather than trying to help American families and boost real estate activity, I can’t help but be a bit skeptical. Symbolism over substance bothers me no end.

The White House statement also goes on to say that we can expect the Administration to take additional steps to cut red tape and, “…clarify lending standards to build on the measures announced today.” If this proves to be true, additional actions could very well help to improve the housing sector and the general economy. We shall see.

In the meantime, as reported by Brena Swanson in another recent HousingWire article, “Radian: Mortgage Delinquencies steadily decrease,” she states that private mortgage insurer stocks are “quickly dropping” in the market due to the news mentioned above in the White House statement about the FHA insurance premium rate cut. Unintended consequences, perhaps.

But I say, in addition to government “action,” unleash the restraints on the private sector to positively impact the housing sector of our economy and create a genuine, rather than the artificial and superficial recovery in which we now find ourselves.

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