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What to Know About FHA’s Recent Changes

by Stephanie Sims

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President Obama and the FHA recently announced that it would reduce its mortgage insurance premium from 1.35 to 0.85, which makes FHA loans even more affordable.

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. So in return for the low down payment mortgage, the homeowner must pay an extra fee, in the form of mortgage insurance. The last couple years, though, borrowers faced higher mortgage insurance fees, as a result of the FHA’s shaky finances.

Though critics are stating that the FHA should keep its premiums at its 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.

However, some important points to keep in mind, according to James Burke, senior branch manager at Flagstar Bank, is that, first, 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. Secondly, 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 as 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.

FHA lowered its insurance premium to compete with Fannie Mae, Burke says, which recently announced that it would offer 3 percent down on products. Historically, Fannie Mae and Freddie Mac require 5 percent down, and as the market starts to recover, agencies that guarantee loans – Fannie, Freddie and Ginnie Mae – are ultimately loosening.

“Credit requirements remain the same, but historically, the biggest impediment for people to buy hasn’t been the ability to qualify, but instead, it’s coming up with the down payment,” Burke says. “With FHA in addition to Fannie and Freddie offering less of a down payment, this opens the door to more buyers, which is a great start to the 2015 market.”

The latest Bureau of Labor Statistics Report revealed on Friday, Jan. 9 that unemployment rates in Illinois ticked down another tenth of a point. While job growth is happening, wage growth is slower to increase, according to the report, and student debts are still a hindrance when it comes to Millennials buying. However, as Burke points out, they can’t live in their parents’ basement forever, and with rents steadily increasing, buying might be more affordable in the near future.

“Wages haven’t grown, but we can mitigate that with looser credit and lower down payments,” he says.
“Even if buyers have debt, with smaller down payments, more buyers can enter the market,” Burke says. “We are also trending below the level for inflation, and once we hit that, the rates will increase so that we can prevent inflation. The spring market typically happens after the Super Bowl, but with these recent changes and trends, the market has been more active than it has been historically in January.”

The Mortgage Bankers Association predicts that mortgages for refinancing and home purchases likely will rise 6 percent this year over last year – all the market needs is for the stronger job market to be coupled with wage growth.

“We’re going to see a resurrection in wage growth,” says Mark Zandi, chief economist at Moody’s Analytics. “That’s going to give potential homebuyers a lot of financial firepower and give them the boost of confidence they need to make a big-ticket purchase like a home.”

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