An hour after Donald Trump took the oath of office last month, his administration caught the attention of the real estate industry when it abruptly suspended a planned cut in Federal Housing Administration mortgage-insurance premiums.
The Department of Housing and Urban Development cited the need for further analysis to protect taxpayers in halting the policy that would have saved FHA borrowers as much as $1,000 or more a year.
But the move by the FHA’s parent agency, which overturned a decision the Obama administration had made on its way out the door, could signal something else: a new conservative bent to the nation’s housing policy.
Guy Cecala, publisher of Inside Mortgage Finance, which tracks the residential mortgage market, noted that past administrations have tweaked the premium rate as they sought to either bring more people into the program or drive them away.
“Over the years, probably half the changes in the program have been political,” he said.
And there could be more ahead. Trump’s nominee for HUD secretary, Ben Carson, during his confirmation hearing a week before the inauguration, signaled in an exchange with a Republican senator that he might be open to some housing policy changes.
“Taxpayers are on the hook for $1.2 trillion worth of mortgages,” said Sen. Pat Toomey, R-Pa., referring to the total volume of FHA-backed home loans. “All the while there is a private industry in the business of insuring mortgages.”
Carson, in response, said it didn’t matter what particular entity provides insurance, but there has to be some sort of “backstop.”
The FHA, created during the Great Depression when home-building had almost ground to a halt, is such a backstop.
To encourage more lending, the agency provides insurance to approved private lenders in the case of default.
In general, borrowers who are able to make a down payment amounting to 20 percent of a home loan don’t need mortgage insurance, and for those who can’t pony up that amount of cash but have good credit, cheaper insurance from private companies is often available.
But the FHA, with its mission to boost homeownership, is often a preferred option for cash-poor, first-time home buyers and those with spotty credit — or a combination of both.
Down payments can be as little as 3.5 percent of the purchase price, and the program is open to borrowers with credit scores as low as 500, which could signal a past bankruptcy or debts sent to collection.
Improved after bailout
Despite the generous underwriting standards, the mortgage insurance premiums covered defaults and fully funded the FHA for decades — until it received its first taxpayer bailout in 2013 because of fallout from the housing bust. Since then, the agency’s finances have improved significantly, though that hasn’t assuaged the concerns of some Republicans.
Shortly after the election, Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, pointed to a bill his committee passed in 2013 as the “right vehicle for reform” of the nation’s housing finance system.
That bill, the Path Act, would have raised the minimum down payment for FHA mortgages to 5 percent for borrowers who are not first-time home buyers.
Beyond that category, it would have limited program access to low- to moderate-income Americans and applications within a disaster area or during a “counter-cyclical market,” as defined by the government. The bill also would have tightened requirements on borrowers who had previous foreclosures.
“The Path Act shifts risk away from the taxpayers and into the private sector by reducing FHA’s footprint and making sure the agency is complementing the private sector, not competing with it,” Hensarling said shortly after the bill passed the House Financial Services Committee in 2013.
The bill didn’t move forward during the 2013-14 congressional session — a time when Republicans controlled only the House — but could have a brighter future today.
“Given that Republicans (now) control both the House and Senate, not to mention the White House, I don’t think it is a stretch to say there is a fairly decent chance that something like the Path Bill becomes law,” Cecala said in an email.
Currently, most borrowers getting an FHA-backed loan pay a one-time, upfront premium of 1.75 percent of their loan, plus an annual premium (paid monthly) that is 0.85 percent of the original loan. The fees can add up.
For a borrower putting 3.5 percent down on a $200,000 loan, that amounts to an upfront cost of $3,500 and $142 in monthly premiums. That totals about $17,000 in mortgage insurance premiums after just 10 years.
The Obama rate reductions would have lowered the annual premium rate for most borrowers to 0.60 percent and saved $500 a year for borrowers who put down less than 5 percent on a $200,000, 30-year mortgage.
For a $600,000 loan in higher-cost markets, savings would be $1,500 annually.
But despite the costs, the FHA — even without the Obama rate cut — tends to be cheaper than private mortgage insurance for borrowers with poor to fair credit who can’t make down payments of even 5 percent, said Richard Cirelli, a Laguna Beach, Calif., mortgage broker.
What’s more, some repeat and wealthier buyers with credit problems have a hard time qualifying for non-FHA loans, said Jeff Lazerson, another Southern California mortgage broker.
If the Path Act became law, he said, “It would knock out a lot of people — period.”
But any significant change that would make FHA-backed mortgages less attractive or available would probably cause blowback from the real estate industry, including the 1.2-million member National Association of Realtors.
The group strongly opposed the Path Act in 2013, saying the proposed changes to FHA, as well as Fannie Mae and Freddie Mac, which support the conforming loan market, would “jeopardize the ability of American families to purchase a home, as well as the future of the housing industry itself.”
The Realtors also called on the Trump administration to reverse its decision on the recent rate cut.
Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA, said he expects the administration will have a conservative tilt in housing policy, but he noted that it’s uncertain how the debate over housing policy will play out.
“Ben Carson is a complete unknown in the housing world,” he said.
Risk of loss
In addition to any political calculations, there is actuarial math that has to be considered as well.
Premiums are set by FHA so it can cover lender losses if borrowers default. By law, the agency is required to have a capital reserve ratio in its Mutual Mortgage Insurance Fund of 2 percent of all outstanding loans.
During the height of last decade’s housing boom, borrowers shunned the FHA despite an annual premium of 0.50 percent and instead took out easy-to-get, risky subprime loans doled out with little underwriting. In most cases, Cecala said, not even private mortgage insurance was required.
As a result, by 2005, FHA loans for home purchases and refinances had trickled to 3.1 percent of the total mortgage market, down from 11.7 percent in 2000.
But when the subprime bubble popped, the FHA became a lender of last resort and Congress expanded the program in 2008 to shore up the national housing market, doubling the price of a home that could be purchased with an FHA loan.
The economy, however, continued to crater.
By 2009, FHA loans totaled 21.1 percent of the mortgage market, and accounted for 32.6 percent of purchases.
Annual premium increases were put into place to cover defaults, with rates rising to 1.35 percent of the loan. Most new borrowers were also required to pay that rate for the life of the loan, rather than a minimum of five years.
It wasn’t enough. In September 2013, the FHA tapped the U.S. Treasury for $1.7 billion because of losses from loans it insured from 2007 to 2009.
Since then, higher annual premiums have helped the insurance fund exceed its 2 percent minimum reserve ratio requirement for two successive years, even as the Obama administration cut rates for most borrowers from 1.35 percent to its current 0.85 percent rate in 2015.
The ratio hit 2.3 percent at the time of the Obama administration’s planned final rate cut to 0.60 percent, which had been set to take effect Jan. 27.
One consumer group would have liked to see even further cuts, saying that delinquencies and defaults are the result of loose underwriting standards and the health of the economy, not premium rates.
Lending is “safer than it’s ever been,” said John Taylor, president of the National Community Reinvestment Coalition.
But conservatives are resisting calls for further cuts, including from American Enterprise Institute fellow Edward Pinto, a former Fannie Mae chief credit officer. He said that premium cuts during a hot housing market just juice demand and send prices higher, which can undercut affordability and put the market on an unsustainable trajectory.
In particular, Pinto expressed concern over the large share of home loans in the boom-and-bust state of California.
In December, 20 percent of all home sales in California used FHA-backed home loana, according to real estate data firm CoreLogic. That’s down from a high of nearly 39 percent in 2010, but up sharply from less than 1 percent for all of 2005 and 2006.
“California is the most volatile home prices state in the country,” said Pinto, who was a member of Trump’s transition team. “At some point, there will be a correction.”
Pinto argues that local governments should do more to increase home-building to expand supply.
“You can’t fix housing affordability with more leverage in a sellers market,” he said. “We did that in the ’90s-and-aughts market and we almost cratered the world’s economy.”
