Mortgage

Urban Institute: Suspending the FHA mortgage insurance premium cut is a good idea

3 ways the cut impacts the mortgage market

Shortly after President Donald Trump was sworn in last Friday, the Department of Housing and Urban Development sent out an announcement suspending the FHA mortgage insurance premium cuts indefinitely.

The news drew a lot of backlash from consumer groups, who argue that suspending the cut will leave thousands of borrowers on the sidelines.

But the Urban Institute posted a blog on the recent HUD announcement, stating that not only is the suspension a good idea but it should continue until the FHA Mutual Mortgage Insurance Fund can build up more money.

“A close look at the planned price reduction, however, reveals that the impact on the market would have been small and retaining the current price to help shore up FHA funds for a rainy day is a more prudent choice,” said Laurie Goodman and Bing Bai, authors of the blog.

The blog lists three potentially small effects on the mortgage market if HUD reinstates the FHA mortgage insurance premium cut.

Here’s a snippet of the first point. Check out the blog for all three.

1. Access to mortgages would have expanded marginally.

The FHA has traditionally been the main provider of mortgages for low- to medium-income and first-time homebuyers who have little saved for a down payment.

But this 25 bps in savings in annual FHA insurance premiums would have come when mortgage rates had increased 58 bps since the November election. The higher mortgage rates clearly offset the potential insurance savings, so no borrower would have been in a better position to borrow after the price reduction than they were two to three months ago when rates were lower.

Ultimately, the blog explains, “The premium cut proposed by Secretary Castro would have had a small impact on expanding access to credit. Forgoing this cut strengthens the FHA’s financial situation and allows the FHA Mutual Mortgage Insurance Fund to build its buffer.”

The blogs concluded that if the Trump administration truly wants to expand the credit box, it should focus on the two big issues that limit lenders’ willingness to lend: removing the uncertainty over enforcing the False Claims Act and reducing the costs and complexities of servicing troubled loans.

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