Whither FHA Premiums?

Various NBC News affiliates quoted me in What You Need To Know About Trump’s Reversal of the FHA Mortgage Insurance Rate Cut. It opens,

On his first day in office, President Donald Trump issued an executive order to undo a quarter-point decrease in Federal Housing Administration (FHA) mortgage insurance premiums. The rate decrease had been announced by the Obama administration shortly before Trump’s inauguration. Many congressional Republicans, including incoming Department of Housing and Urban Development Secretary Ben Carson, opposed the Obama administration’s rate cut because they worried that the FHA would not be able to maintain adequate cash reserves.

What does this mean for potential homebuyers going forward? We’ll explain in this post.

How FHA mortgage insurance premiums work

FHA-backed mortgages are popular among first-time homebuyers because borrowers can get a loan with as little as 3.5% down. However, in exchange for a lower down payment, borrowers are required to pay mortgage insurance premiums. Lower mortgage insurance premiums can make FHA mortgages more affordable, and help incentivize more first-time homebuyers to enter the housing market.

On January 9, 2016, outgoing HUD Secretary Julian Castro announced that the administration would reduce the annual mortgage insurance premiums borrowers pay when taking out FHA-backed home loans.

For most borrowers, the rate reduction would have meant mortgage insurance premiums decrease from 0.85% of the loan amount to 0.60%. The FHA estimated that the reduction, a quarter of one percentage point, would save homeowners an average of $500 per year.

To see how the numbers would compare, we ran two scenarios through an FHA Loan Calculator — once with the reduced MIP, and again with the higher rates.

Using the December 2016 median price for an existing home in the U.S. of $232,200 and assuming a 30-year loan, a down payment of 3.5%, and an interest rate of 3.750%, the difference in the monthly payment under the new and old rates would be as follows:

Monthly payment under the existing MIP rate: $1,213.27

Monthly payment with the reduced MIP rate: $1,166.98

Annual savings: $555.48

What the rate cut reversal means for consumers

This could be bad news for people who went under contract to buy a house using an FHA loan during the week of Trump’s inauguration. Those buyers could find that their estimated monthly payment has gone up.

Heather McRae, a loan officer at Chicago Financial Services, says Trump’s move was unfortunate. “A lower premium provides for a lower overall monthly payment,” she says. “For those homebuyers who are on the bubble, it could be the deciding factor in determining whether or not the person qualifies to purchase a new home.”

David Reiss, a law professor at the Center for Urban Business Entrepreneurship at Brooklyn Law School, says the change will have only a “modest negative impact” on a potential borrower’s ability to qualify for a loan.

To be clear, the fluctuating mortgage insurance premiums do not affect homeowners with existing loans. They do affect buyers in the process of buying a home using an FHA-backed loan, and anyone buying or refinancing with an FHA-backed mortgage loan in the future. Had the rate cut remained in effect, Mortgagee Letter 2017-01 would have applied to federally-backed mortgages with closing/disbursement dates of January 27, 2017, and later.

Reiss does not believe the rate reversal will have an impact on the housing market. “Given that the Obama premium cut had not yet taken effect,” he says, “it is unlikely that Trump’s action had much of an impact on home sales.”

HUD, Exit Stage Left

photo by Gage Skidmore

Obama HUD Secretary Julián Castro

President Obama had members of his Cabinet write Exit Memos that set forth their vision for their agencies. Julián Castro, his Secretary of HUD, titled his Housing as a Platform for Opportunity. It is worth a read as a roadmap of a progressive housing agenda. While it clearly will carry little weight over the next few years, it will become relevant once the political winds shift back, as they always do. Castro writes,

Every year, the U.S. Department of Housing and Urban Development (HUD) creates opportunity for more than 30 million Americans, including more than 11.6 million children. That support ranges from assisting someone in critical need with emergency shelter for a night to helping more than 7.8 million homeowners build intergenerational wealth. Simply put, HUD provides a passport to the middle class.

HUD is many things but, most of all, it is the Department of Opportunity. Everything we did in the last eight years was oriented to bring greater opportunity to the people we serve every day. That includes the thousands of public housing residents who now have access to high-speed Internet through ConnectHome. It includes the more than 1.2 million borrowers in 2016 – more than 720,000 of them first-time homebuyers – who reached their own American Dream because of the access to credit the Federal Housing Administration provides. And it includes the hundreds of thousands of veterans since 2010 who are no longer experiencing homelessness and are now better positioned to achieve their full potential in the coming years.

Our nation’s economy benefits from HUD’s work. As our nation recovered from the Great Recession, HUD was a driving force in stabilizing the housing market. When natural disasters struck, as with Superstorm Sandy in the Northeast, the historic flooding in Louisiana, and many other major disasters – HUD helped the hardest-hit communities to rebuild, cumulatively investing more than $18 billion in those areas, and making it possible for folks to get back in their homes and back to work. And when we invested those dollars, we encouraged communities not just to rebuild, but to rebuild in more resilient ways. The $1 billion National Disaster Resilience Competition demonstrated our commitment to encourage communities to build infrastructure that can better withstand the next storm and reduce the costs to the American taxpayer.

Housing is a platform for greater opportunity because it is so interconnected with health, safety, education, jobs and equality. We responded to the threat posed by lead-contaminated homes by launching a forthcoming expansion of critical protections for children and families in federally assisted housing. And we finally fulfilled the full obligation of the 1968 Fair Housing Act by putting into practice the Affirmatively Furthering Fair Housing rule to ensure that one day a child’s zip code won’t determine his or her future.

Much has been accomplished during the Obama Administration, but new challenges are on the horizon, including a severely aging public housing stock and an affordable housing crisis in many areas of the country. Just as HUD provided necessary reinforcement to the housing market during the latest economic crisis, this vital Department will be crucial to the continued improvement of the American economy and the security of millions of Americans in the years to come. (2)

There is a fair amount of puffery in this Exit Memo, but that is to be expected in a document of this sort. it does, however, set forth a comprehensive of policies that the next Democratic administration is sure to consider. If you want an overview of HUD’s reach, give it a read.

Affirmatively Furthering Fair Housing

OLYMPUS DIGITAL CAMERAAnthony22 at English Wikipedia [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

The United States Court of Appeals for the Second Circuit issued a ruling in Westchester v. HUD, No. 15-2294 (Sept. 25, 2015) the longstanding case regarding whether Westchester County has “adequately analyzed — in its applications for HUD funds — impediments to fair housing within the County’s jurisdictions.” (3) The Second Circuit affirmed the District Court’s judgment in favor of HUD, which means that HUD’s withholding of funds under the Community Planning and Development (CPD) Formula Grant Programs stands.

HUD withheld those funds because it found that the County had failed to “assess the impediments to fair housing choice caused by local zoning ordinances or to identify actions the County would take to overcome these impediments.” (6) HUD further found, as a result that the County would not “affirmatively further fair housing” as required by the Fair Housing Act. (6)

The case resolved a narrow, legalistic question:

May HUD require a jurisdiction that applies for CPD funding to analyze whether local zoning laws will impede the jurisdiction’s mandate to “affirmatively further fair housing”? Because HUD may impose such a requirement on jurisdictions that apply for CPD funds, and because the decision to withhold Westchester County’s CPD funds in this case was not arbitrary or capricious, we conclude that HUD’s action complied with federal law. (50)

While the case was decided on narrow grounds, the Court does notes that

The broader dispute between the County and HUD implicates many “big‐picture” questions. Beyond prohibiting direct discrimination based on race or other protected categories, what must a jurisdiction do to “affirmatively further fair housing”? What is the difference, if any, between furthering “fair” housing and furthering “affordable” housing? How much control may HUD exert over local policies, which, in its view, impede the creation of “fair” or “affordable” housing? And if conflicts of this sort between HUD and local governments are to be avoided, is the simplest solution to avoid applying for federal funds in the first place? (32)

These are all very good questions and it is unfortunate that this case does not help to answer any of them. The level of segregation in the United States by race has been a tragedy for many, many decades and we are no closer to figuring out how to deal with it after all these years.

Reiss on GSE Privatization

GlobeSt.com quoted me in Waiting to Say Goodbye to the GSEs. It reads in part,

US HUD Secretary Julian Castro added another “to do” item to the lame duck Congress’ list of things they should get done before they adjourn on Dec. 11: pass the bipartisan Johnson-Crapo Senate bill introduced earlier this year that would wind down the GSEs.

“This could be, I believe, a good victory in the lame duck session or next term of Congress for housing finance reform,” he said in an interview with Bloomberg Television earlier this week. The crux of the plan – doing away with Fannie Mae and Freddie Mac, creating a backstop for these loans and removing tax payer risk – are all supported by the Obama Administration, he said.

“Housing finance reform will continue to be a priority for the Obama Administration,” Castro said.

The multifamily finance industry has been expecting GSE reform for years now; certainly there have been calls for their dismantlement when they were placed in conservatorship in 2008 during the depth of the financial crisis. Many in the industry, in fact, would welcome their sunset, in the expectation that the private sector could fully and more efficiently and more cheaply provide the same level of funding.

That is not the unanimous sentiment though. In fact, opinions about the subject in commercial real estate range, widely, across the board from “it is about time” to “the politics are too strident for it to happen” to “maybe it will happen but it is difficult to believe the GSEs could entirely be replaced by the private sector.”

*     *     *

David Reiss, a professor of Law and Research Director, Center for Urban Business Entrepreneurship (CUBE) at Brooklyn Law School, has been calling for the privatization of Fannie and Freddie for some time and is dismissive of the “Chicken Little claims” that the sector will collapse if the government reduces its footprint in multifamily and single-family housing finance.

“With a carefully planned transition, it is eminently reasonable to believe that we can put private capital in a first loss position for multifamily housing so long as the government retains a role in subsidizing affordable housing and acting as a lender of last resort when necessary,” he tells GlobeSt.com.

FHA’s Financial Health Looking Up

HUD has released the Annual Report to Congress Regarding the Financial Status of the Mutual Mortgage Insurance Fund Fiscal Year 2014. It appears that things are looking up for the FHA, particularly after last year’s mandatory appropriation from the Treasury, the first in the FHA’s 80 year history. For those of you who are not housing finance nerds, the Mutual Mortgage Insurance Fund (MMIF) is the financial backbone of the FHA’s single-family mortgage insurance program.  When it is in bad shape, the FHA is in bad shape.

As Secretary Castro notes in his forward to the report,

The value of the Fund has improved significantly, now standing at $4.8 billion. The increased economic value represents a capital reserve ratio of 0.41. This improvement shows tremendous progress, especially considering that the Fund had a negative value of $16.3 billion just two years ago. The two-year gain in Fund value is an impressive $21 billion. The performance of the portfolio has improved dramatically in a short period of time. Foreclosures are down 68 percent since the height of the crisis and recoveries to the Fund have improved 68 percent from their lowest level–saving billions of dollars. While FHA must still respond to challenges presented by legacy books and market volatility, the independent actuary’s report demonstrates that FHA is firmly on the right track and is projected to continue improving. (1)
The MMIF is supposed to have a capital reserve ratio of 2 percent, so the FHA is still quite a bit away from receiving a clean bill of health. But according to projections, it should achieve that level in 2016 and then continue to improve from there. (35, Ex. II-3)
While this is all pretty abstract, there are some pretty concrete aspects to the health of the MMIF. The size of FHA premiums, paid by homeowners borrowing FHA-insured mortgages, is set in the context of the health of the MMIF because the FHA is a self-funded government agency. So low reserves means that it is harder to cut premiums. Higher FHA premiums mean that  mortgages are more expensive for the low- and moderate income borrowers who make up a large part of the FHA’s book of business. So the health of the MMIF is an indicator of sorts of the health of the housing market overall.

Reiss on Castro at HUD

Law360 quoted me in Obama Chooses San Antonio Mayor As Next HUD Chief (behind a paywall). It reads in part,

President Barack Obama on Friday nominated San Antonio Mayor Julian Castro to be the next secretary of housing and urban development, a move that observers say will result in the continuation of his administration’s housing policies.

If confirmed, Castro would take over an agency that is still dealing with the after-effects of the bursting of the housing bubble in 2007 and the resulting foreclosure crisis. HUD is also struggling to deal with a dearth of affordable housing in major metropolitan areas and reforming the Federal Housing Administration’s work.

Obama called Castro an “all-star” who has done a “fantastic job” in San Antonio over the last five years.

“He’s become a leader in housing and economic development,” the president said.

Speaking at the White House on Friday, Castro said that he looked forward to helping Americans get access to “good, safe affordable housing.”

“We are in a century of cities. America’s cities are growing again and housing is at the top of the agenda,” Castro said.

Castro would take over HUD from outgoing Secretary Shaun Donovan, whom Obama nominated to lead the Office of Management and Budget. Donovan would in turn replace Sylvia Mathews Burwell, Obama’s nominee to be the next secretary of health and human services.

Among his major tasks will be overseeing the FHA, which provides a government guarantee on mortgages issued to low-income and first-time homebuyers. The agency, which is led by Commissioner Carol Galante, last year was forced to take a $1.7 billion bailout from the Treasury Department as its reserves were depleted due to losses on bad loans.

In response, the FHA has increased insurance premiums on most new mortgages by 10 basis points and sold off some defaulting mortgages as part of a series of reforms aimed at bolstering its capital levels. Even with those changes, the bailout was necessary.

HUD has also been a key player in the Obama administration’s heavily criticized programs aimed at stemming foreclosures, including the Home Affordable Mortgage Program, and in efforts to develop affordable housing stock around the country.

The department is also at the center of fair lending and fair housing litigation against banks and other lenders.

Castro’s views on those subjects are unknown, but observers expect him to follow closely policies established by his predecessor Donovan.

“Our conversations lead us to believe that Castro is unlikely to deviate materially from the existing FHA single-family strategy,” Isaac Boltansky, an analyst at Compass Point Research & Trading LLC, said in a note to clients.

Castro, 39, is serving his third term as San Antonio’s mayor. A rising star in the Democratic party, Obama tapped Castro to give the keynote address at the 2012 Democratic National Convention in Charlotte, North Carolina.

In many ways the appointment is seen as a political decision as much as a policy one for housing experts, and a departure from Donovan, an expert on housing policy.

“Donovan focused his entire career on housing and affordable housing in particular. He is known for his deep understanding of housing issues. Mayor Castro has had a broader portfolio of concerns as a big city mayor,” said Brooklyn Law School professor David Reiss.

*     *     *

While Castro has focused on affordable housing issues, the mayor of San Antonio is a nonexecutive position, Reiss noted.

“So his ability to implement his vision will be tested in this new position,” he said.