3 Things to Know About the FHA's Plan to Reduce Mortgages Costs

3 Things to Know About the FHA’s Plan to Reduce Mortgages Costs

by Peter Thomas Ricci

January 08, 2015

So, word is spreading that the FHA will lower the cost of its mortgages; here are the things you should know about it.

News broke yesterday from a variety of outlets that the FHA is planning on reducing borrowing costs for prospective homeowners; such news is notable, given that it comes after a long line of cost increases from the cash-strapped agency.

What are the specifics of the FHA’s plan, and how will it impact your clients looking for FHA mortgages? Here are the three things you should keep in mind:

1. The FHA’s Plan Will Tackle Mortgage Insurance – The FHA, which is overseen by HUD and insures mortgages with down payments as low as 3.5 percent, finances its operations via mortgage insurance, which borrowers pay in addition to their monthly mortgage. It’s a classic switcharoo: for nabbing a low-down payment mortgage, the homeowner must pay a few more fees as a result. The last couple years, though, borrowers faced higher mortgage insurance fees, as a result of the FHA’s shaky finances.

Now, though, the FHA will lower those premiums, reportedly dropping them from 1.35 percent to 0.85 percent.

2. The FHA Can Afford It – Given that the FHA increased mortgage premiums in 2013 because of shaky finances, is it really a good idea for them to lower those premiums now in 2015?

Though critics are stating that the FHA should keep its premiums at their current level, the agency’s finances have improved dramatically in the last year. According to an independent audit in November, the FHA’s insurance fund (a rainy-day fund of sorts that mortgage premiums fund) was valued at $4.8 billion; that’s up from a $1.1 billion deficit in 2013, and spurred many industry advocates (including NAR and the MBA) to lobby for lower premiums.

3. It’s Impact May be Marginal – And now the rub: it’s unlikely that lower mortgage premiums at the FHA will lead to any kind of surge in homebuyer demand, simply because the savings from the lower premiums may not amount to that much money. Three points:

•Firstly, according to an analysis by Sterne Agee, a borrower with a 30-year, $100,000 mortgage insured by the FHA would save roughly $25, at most, in their monthly mortgage payments. Though Sterne Agee admitted that its analysis was more back-of-the-envelope than anything else, it argued, “This savings will pull some marginal borrowers into homeownership, but it isn’t enough, in our view, to assume single family housing demand increases above our current assumption.”

•Secondly, we cannot forget that the FHA is not the one originating the mortgages in question; rather, the FHA insures the mortgages, and it’s unlikely that lower premiums would change the risk calculus that originators consult when deciding on granting loan requests to consumers.

•Thirdly and most importantly, lower FHA mortgage premiums do not change the greater economic forces currently impacting the housing market, namely low savings rates and even lower wage growth. It’s the same housing quandary we reported on when Fannie Mae announced lower down payment standards – some consumers will undoubtedly benefit from lower premiums, but it’s unlikely that housing will kick into high gear as a result of the policy.