One of the first actions by President Trump after assuming office on Jan. 20, 2917 was to suspend the reduction of FHA’s mortgage insurance premium.
The premium cut was done by former President Obama in the few days before he left office.
FHA mortgage insurance premiums have been getting more scrutiny since FHA’s top fund, the Mutual Mortgage Insurance Fund, reached its threshold of 2% well ahead of schedule in November 2015.
The news was a surprise because the MMIF getting to 2% went against common speculation that Obama’s decision to reduce mortgage insurance premiums by fifty basis points would affect the health of the fund. The fact is that delinquencies and defaults on FHA home loans has been rising lately.
However, Ben Carson, the new head of the Department of Housing and Urban Affairs, made it clear that it was unlikely that the rate cut would take effect as Obama had planned.
While some in the mortgage and real estate industry are up in arms about the suspension of the cut, we thing there are several reasons to not worry too much about it:
#1 Trump Will Reexamine the Entire FHA Program
The new president has a very full plate in his first few weeks in office. It seems likely that President Trump will review the entire FHA program before he proceeds with a insurance premium rate cut.
It is likely to us that he wants to review the health of the FHA and weigh that while considering lowering mortgage insurance premiums.
#2 Many Think That Trump Will Reauthorize the Cut
Many mortgage insiders claim that the Obama administration did not clearly communicate what it intended with the FHA premium cut.
They think the delay in implementing the premium cut is acceptable.
They also think that it is likely the Trump Administration will re-institute the cut once it has reviewed the health of the entire FHA department.
They think that the administration will look over the entire program and will make changes that will open up home ownership to more Americans.
#3 The Mortgage Insurance Cut Never Went Into Effect At All
There has been harping in the national media that thousands of homeowners had their mortgage insurance premium hiked. That isn’t what happened at all, experts argue.
Obama scheduled the rate cut to go into effect in the near future, and Trump rescinded it. No one had their premiums go up. And again, it is possible that Trump will bring the rate cut back after a complete review of the program. 1st time home buyers should get plenty of opportunities to secure affordable housing in 2017.
#4 The Rate Cut Was a Pure Political Move By Obama
Another argument for rescinding the cut made by Obama at the last minute is that it was done for purely partisan reasons. It is common for lame duck presidents to make last minute moves on policy that attempt to box in the new president.
Some argue that that is what Obama intended here. If Obama thought that the rate cut was a good idea, he would have done it sooner. They believe that Obama wanted to put Trump into a no win situation: repealing the cut or allowing the FHA to risk becoming insolvent. With this in mind, it is logical for Trump to walk back the premium rate cut and research the issue more.
More About FHA Loan Programs
No matter what the exact rate is for FHA mortgage insurance, there is no denying that FHA mortgages are a very important part of home ownership in America.
FHA backed loans allow millions more people every year to get into a home of their own. Here’s how they work: Each FHA backed loan is underwritten by an FHA approved lender. That lender follows certain guidelines by FHA to offer the loan to the borrower. The FHA will pay off the loan for the lender if the buyer does not pay.
This guarantee by FHA allows lenders to lower their lending standards for millions of potential homeowners. Borrowers can get a loan for as little as 3.5% down, and there are very flexible credit and debt to income standards.
Each borrower does have to pay for monthly mortgage insurance, but this seems to be a small price to pay; after all, most FHA borrowers are able to put down less than 10% and as little as 3.5%. Paying a monthly mortgage insurance premium of $100 or $150 per month seems reasonable to us.
The Bottom Line
The FHA program is one of the bedrocks of the American housing industry. Anything that the Trump administration can do to support the program is a good idea. It seems reasonable for Trump to review the logic of the rate cut and to ensure that the program is financially solvent. One the administration has time to do that, they may well bring the cut back, as well as make other needed changes in the FHA program.