In a move designed to hopefully bring more first-time homebuyers into the housing market, President Barack Obama said Wednesday "the Federal Housing Administration (FHA), the government insurer of home loans, will lower its annual insurance premiums from 1.35% to 0.85%". The White House stated the move was part of the president's efforts `"to expand responsible lending to creditworthy borrowers.'' The president spoke about improvements in the housing market at a speech on January 8, in Phoenix, one of the hardest-hit markets of the housing crash.
For the average FHA applicant, the decrease in premiums is a savings of about $80 on their monthly payment, according to CoreLogic's chief economist, Sam Khater. "So it's positive news from a consumer welfare perspective, especially for first-time homebuyers, which account for the majority of FHA's business," he said, adding, "However, I think the marginal impact on sales will be small because potential buyers make the decision to purchase based on trigger events, such as a new job, marriage, kids, etc. Changes in affordability only impact how much home they can buy."
The FHA had been the lowest down payment product available, with a minimum of 3.5% down, but recently Fannie Mae and Freddie Mac announced a new 3% down payment product that would require private mortgage insurance. The product would compete directly with the FHA and offered some borrowers a cheaper option if they had a good credit score. "We believe the cut is strategic. Our view is that FHA was at risk of losing enough market share—especially of higher-quality borrowers—to the GSE 97 percent down mortgage that it could have put at risk the ability of the FHA fund to reach its 200 basis point reserve requirement this year as it had forecast. By cutting the premium, FHA would increase its share of the market and should be back on track to meeting the reserve requirement despite the cut in revenue," wrote Jaret Seiberg, an analyst at Guggenheim Partners.
The FHA's volume had increased significantly at the beginning of the housing crash, making up for the lack of credit in the private market, but that came at a price. In order to rebuild its fund, it had to more than double its annual insurance premium and raised average credit scores. Which made it much more difficult for borrowers today to afford an FHA loan.
Lowering the premium increase volume to the FHA, but it will also bring back risk. "That is clearly the tension with any lending program that encourages low down payment," said Stevens. "But we are in a different position. We are clearly in an environment where home prices are very stable with steady growth. You don't have the dynamics to create any type of housing bubble."
Mortgage volume has been stagnant, even with interest rates falling to near record lows. The Obama administration is looking for new ways to boost homeownership, as investor activity subsides and the market is left to mortgage-dependent buyers. "Now that we've made it harder for reckless buyers to buy homes that they can't afford, let's make it a little bit easier for qualified buyers to buy the homes that they can afford," said Obama in an August 2013 speech, also in Phoenix. At that time he did not make mention of the FHA, which was still in the red, but instead boasted refinance programs and less red tape for lenders. Obama is also expected to address the issue of putbacks at the FHA, which is when lenders are forced to buy back bad loans. Fannie Mae and Freddie Mac, the Federal Housing Finance Agency, has already looked to clarify these rules, which have created huge costs for lenders and unfortunately higher costs for borrowers.
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