Of all the important issues and reforms, we must address in the U.S. housing market, reducing the Federal Housing Administration (FHA) mortgage insurance premiums (MIP) should not be at the top of our priorities list.
However, in an 11th hour move by the outgoing Obama administration in early January, the Department of Housing and Urban Development (HUD) announced a cut in FHA MIP, which are fees that serve to shield U.S. taxpayers from mortgage credit risk. On January 20, following the inauguration of President Trump and before the planned rate cut even went into effect, the new administration appropriately suspended the proposed reduction to give the incoming team some time to review the decision. Because some dust has kicked up around this news, it’s important to clear the air.
For all practical purposes, nothing has or will change. That’s right, the FHA’s low down payment mortgage option isn’t going away and remains the same as it was last month, or last year.
For those who track federal housing and mortgage finance policy (because there isn’t much else going on these days in Washington!), the debate over suspending the FHA MIP rate cut and leaving fees as-is is a reminder that Washington’s right hand doesn’t always know what (and why) its left hand is doing – even though it should. The FHA is one piece of a larger and interconnected system, and a decision to adjust its fees up or down, along with the rationale behind such a decision, is extremely relevant and consequential to the other parts of our mortgage finance system.
Some have been quick to criticize the decision to leave FHA premiums at their current rate, and others have mistakenly argued the decision increases costs for first-time homebuyers (it’s a stretch to suggest costs go up when costs remain the same). On the other side of the debate, scholars at the Urban Institute and American Enterprise Institute, as well as The Washington Post’s editorial board, agree that the rate cut suspension is good public policy.
So what does any of this really mean?
It’s simple. The decision keeps FHA MIP rates the same as they were under the Obama administration, which had – as late as November 2016 – determined that the fees it charges are appropriate for low down payment borrowers who benefit from 100 percent government-insured loans. No borrowers will see any cost increases. They will pay the same amount they originally budgeted for.
FHA MIP serve an important purpose: they protect the federal government, and therefore taxpayers, from risk borne by the FHA when it insures potentially risky loans. Under the Obama administration, mortgage insurance premiums were increased significantly following the 2008 financial crisis as the FHA experienced record numbers of defaults and foreclosures. And in 2013, despite having substantially increased mortgage insurance premiums, the FHA took a $1.7 billion taxpayer-funded bailout due to severe losses on its insured loans.
While people debate over the original announcement to reduce FHA premiums, or the subsequent decision to suspend the cut, it is important to press pause and make abundantly clear that the FHA is not the only game in town for a low down payment mortgage. Conventional low down payment mortgages come with private mortgage insurance instead of FHA mortgage insurance premiums. Doing the math may make a stronger case for a conventional loan with three or five percent down because the key difference is private mortgage insurance can be cancelled once 20 percent equity is built, while FHA cannot. For this reason alone, conventional loans can be a smarter and less expensive option for homebuyers than FHA loans.
And for those who care about things like government risk, conventional loans also don’t expose taxpayers and the government to as much risk compared to FHA loans since private mortgage insurance stands in front of the government to absorb initial losses. To this point, while Fannie Mae and Freddie Mac required a $187 billion bailout during the crisis, it could have been worse. Private mortgage insurers paid tens of billions of dollars in claims, money the government and, thus taxpayers, didn’t have to provide.
America’s Homeowner Alliance is all for promoting home buying, but we feel strongly that growing the rate of homeownership in the United States should be done on solid footing. To the extent this relies on public policy and government programs, AHA does not want to see homeownership rise at the expense of repeating any of the mistakes of the past. Our mission statement is to “protect and promote sustainable homeownership for all segments of America”. It’s hard to have sustainable homeownership if we don’t have a sustainable FHA.
We recognize that government-backed low down payment mortgage programs require fees as a way to sufficiently protect against risk. For the FHA, these fees hopefully mean the program won’t need to turn to the government for a bailout again. At the same time, these fees should not unnecessarily create barriers to entry that leave potential homebuyers on the sidelines, and they should be reevaluated periodically. However, our nation’s mortgage finance system is made up of many interconnected parts, and a decision to raise or lower fees in one part can and does have an impact on other parts. This means a debate about lowering FHA mortgage insurance premiums should not happen in a vacuum.
If the government is serious about reducing homeownership costs for borrowers, then all entities that play a role in mortgage finance should be analyzed together. This means a holistic review of all housing and mortgage finance policies including access to mortgage credit, and these fees at the FHA, Freddie Mac and Fannie Mae. These players raised fees during and after the housing collapse for valid reasons. If in 2017 it is time to rebalance or reduce fees, such a review should be approached systemically across the board. Otherwise, we aren’t really helping new homebuyers get into the market; we would simply be drawing existing homebuyers from one segment of the mortgage market into another. It’s a game of musical chairs.