Mortgage

Here’s why a cut in FHA’s insurance premiums won’t boost its market share

Capital Economics calls the step "too small to halt the downward trend"

Earlier this month, the U.S. House of Representatives passed a bill that slashed the cost of upfront mortgage insurance for first-time homebuyers using mortgages backed by the Federal Housing Administration.

The Housing Financial Literacy Act of 2019, or H.R. 2162, stipulates that first-time homebuyers who complete a housing counseling program to learn about sustaining homeownership can get a 25-basis-point discount (0.25%) on their upfront mortgage insurance for an FHA loan.

But while the push for greater financial literacy is a worthy cause, it’s unlikely to boost FHA’s share of the mortgage market, Capital Economics said in a recent report, calling the premium cuts “too small to halt the downward trend in the FHA market share.”

The economists illustrate the impact of the MIP cuts, using the example of the purchase of a $250,000 home with the minimum down payment of 3.5%.

A first-time buyer who underwent counseling to receive the discount would see their upfront MIP reduced from $4,222 to $3,619. But most people roll this expense into the cost of the mortgage. Assuming a 4.2% interest rate, the cuts would reduce monthly payments by just $3, the economists point out.

This is simply not enough to move the needle for FHA’s lending program, they say, which has faltered in the last year.

FHA’s share of purchase mortgages fell to 16.7% in the third quarter of last year – a low it hadn’t seen in a decade. Capital Economics said the strong labor market in recent years has helped to boost credit scores, allowing more borrowers access to the conventional mortgage market.

And while the economists expect the economy to slow, they don’t expect it will have a significant impact on credit quality.

Couple this with the fact that FHA recently tightened its lending standards to weed out some of the riskier borrowers who were affecting the program, and it’s clear to see why economists don’t predict a major uptick from MIP cuts.

Instead, Capital Economics said it expects FHA’s market share to continue its gradual decline, falling to 15% by the end of 2020.

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