Written By: Joel Palmer, Op-Ed Writer
Will mortgage processors and underwriters see less volume without FHA insurance rate cut? On the day he took office, President Donald Trump rescinded a cut on the insurance premiums charged on Federal Housing Administration mortgages. Opinions vary on how much the reversal will impact mortgage processing and mortgage underwriting.
The outgoing Obama administration lowered the premium amount from 0.85 percent to 0.60 percent, which would have saved borrowers about $500 annually on a $200,000 mortgage. This came two years after a reduction from 1.35 percent to 0.60 percent. The Trump administration, citing concern that the premium cut puts taxpayers at too much risk should there be another housing downturn, overturned the Obama order.
The announced cut hadn’t taken effect, but lenders had started pricing FHA mortgage applications with lower costs. Once the cut was reversed, borrowers faced higher monthly payments and some no longer qualified for mortgages due to strict debt-to-income requirements on FHA mortgages.
The National Association of Realtors stated that increases in FHA mortgage insurance premiums priced about 1.5 million homebuyers out of the market. The NAR further claims that the decision by the Trump administration will keep between 30,000 and 40,000 potential homebuyers from getting a mortgage.
Prior to the 2015 cut in mortgage insurance premiums, FHA loan volume had dropped considerably. Furthermore, the share of the mortgage insurance market backed by the FHA had fallen from 69 percent just before the financial crisis to 30 percent.
On the other hand, The International Center on Housing Risk says it evaluated FHA home loan purchases following the 2015 rate reduction. That data indicates the rate reduction did not make mortgages more available to lower-income borrowers.
What happens, according to the center, is that lower premiums on insurance leads to more favorable mortgage underwriting standards, which enables a higher debt-to-income ratio. This, in turn, encourages buyers to purchase a more expensive home than they otherwise would have.
The American Enterprise Institute, a conservative think tank, says that maintaining the mortgage premium rate will not only has little adverse affect, it may even benefit the industry.
Their research shows cutting mortgage insurance premiums in a seller’s market increases demand for FHA loans. This results in higher home prices, which ultimately makes homes less affordable for FHA borrowers.
The 2015 premium cut also took place during a seller’s market and, according to the AEI, helped exacerbate the supply-demand imbalance. The institute claims its analysis of that cut shoed that prices for FHA-financed homes increased by 3 percentage points more than those purchased with conventional financing. Because of this discrepancy, FHA borrowers reap only a fraction of the benefit of the mortgage insurance premium reduction.
The AEI also disputes claims that the 2015 rate reduction led to an uptick in first-time buyers. They claim that half of those new buyers simply used FHA in lieu of other government programs because of the rate reduction. In their estimation, only 35,000 buyers would have been priced out of the market were not for the insurance premium cut
About the Author
As an NAMP® 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.