Tag Archives: FHA

The FHA Rollback’s Impact on Homebuyers

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MortgageLoan.com quoted me in How Will Killing FHA Insurance Rollback Affect Borrowers? It opens,

Less than an hour after being sworn in as president, Donald Trump signed his first executive order, eliminating a drop in FHA mortgage insurance premiums that was to take effect a week later.

If the rate reduction had stayed in place, the average borrower with a $200,000 mortgage backed by the Federal Housing Administration would have had their mortgage insurance drop by about $500 per year.

The National Association of Realtors estimates that 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new homebuyers will be left on the sidelines in 2017 without the cut.

The FHA doesn’t issue home loans, but insures mortgages and collects fees from borrowers to pay lenders if a homeowner defaults on the loan. The FHA guarantees about 18 percent of all mortgages across the country.

They’re most often used by lower-income, first-time homebuyers, sometimes with low credit scores. The FHA-backed loans require low down payments of 3.5 percent, and allow people with high debt ratios to buy a home.

With mortgage rates rising recently, the Obama administration announced on Jan. 9 a reduction in annual premiums for mortgage insurance for FHA loans from 0.85 percent to 0.60 percent of the loan balance, effective Jan. 27. The premiums are paid monthly.

Some Buyers Lower Expectations

The quarter of a percentage point drop didn’t go into effect because Trump ordered it eliminated. Still, some FHA borrowers were expecting the price drop and budgeting for it in the homes they shopped for, says Joseph Murphy, a Coldwell Banker real estate agent in Bradenton, FL.

Murphy says he’s had a few FHA clients lower their purchasing power with the elimination of the mortgage insurance cut, with one pulling out of buying a $135,000 home and instead dropping down to a $125,000 home because the FHA policy wasn’t changed to give them more money. Another client had to drop from a $200,000 home to a $190,000 one, he says.

“It’s not a big difference,” Murphy says. “But it’s enough of a difference. It’s demoralizing for some customers.”

In some neighborhoods he works with, it’s the difference between a barely hospitable home and a home in a better area.

Impact Disputed

It’s incorrect to say that Trump’s order raised mortgage bills, because it hadn’t taken effect yet anyway when the new president signed it, says Robyn Porter, a Realtor at W.C. & A.N. Miller in Bethesda, Md.

“The FHA insurance rate cut that was recently eliminated should have no impact on buyers,” Porter says. “In fact, the current insurance rates were established under the Obama administration and were the highest rates in more than 10 years.

“So, when Trump eliminated the reduction, they were simply put back to the same rate they had been for years ever since the Obama administration added them in,” she says.

Borrowers with low incomes, middle-of-the-road credit scores or have less than a 20 percent down payment are the main users of FHA loans. “These are typically more at-risk buyers for default,” Murphy says.

“Anything that makes access to money more expensive is going to have an impact, especially for fringe buyers,” he says.

Wealthier buyers either don’t qualify for the program or can bet a better loan rate on a conventional loan if they have good credit.

While it’s a great program for people who need it, not getting a $500 or so cut in FHA mortgage insurance shouldn’t affect buyers, Porter says.

“This is not going to deter somebody from buying a house,” she says.

Not getting a monthly mortgage insurance break of $50 or so per month shouldn’t be the difference in buying a home, she says.

“If that is going to break your bank, you shouldn’t be buying a home,” Porter says.

The overall impact may not be much, but even keeping the FHA rates where they were tends to make borrowing more expensive, increase housing prices and could drive some people away from buying a home, says David Reiss, who teaches about residential real estate at Brooklyn Law School.

“Everything has a marginal impact,” Reiss says.

“The more general point, though, is that FHA premiums have gone up significantly since the beginning of the financial crisis,” he says. “The Trump administration will need to think through the extent to which it wants to support homeownership and how it would do so.”

Whither FHA Premiums?

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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.”

Mortgage Bankers and GSE Reform

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photo by Daniel Case

The Mortgage Bankers Association has released GSE Reform Principles and Guardrails. It opens,

This paper serves as an introduction to MBA’s recommended approach to GSE reform. Its purpose is to outline what MBA views as the key components of an end state, the principles that MBA believes should be incorporated in any future system, the “guardrails” we believe are necessary in our end state, as well as emphasize the need to ensure a smooth transition to the new secondary mortgage market. (1)

While there is very little that is new in this document, it is useful, nonetheless, as a statement of the industry’s position. The MBA has promulgated the following principles for housing finance reform:

  • The 30-year, fixed-rate, pre-payable single-family mortgage and longterm financing for multifamily mortgages should be preserved.
  • A deep, liquid TBA market for conventional single-family loans must be maintained. Eligible MBS backed by a well-defined pool of single-family mortgages or multifamily mortgages should receive an explicit government guarantee, funded by appropriately priced insurance premiums, to attract global capital and preserve liquidity during times of stress. The government guarantee should attach to the eligible MBS only, not to the guarantors or their debt.
  • The availability of affordable housing, both owned and rented, is vitally important; these needs should be addressed along a continuum, incorporating both single- and multifamily approaches for homeowners and renters.
  • The end-state system should facilitate equitable, transparent and direct access to secondary market programs for lenders of all sizes and business models.
  • A robust, innovative and purely private market should be able to co-exist alongside the government-backed market.
  • Existing multifamily financing executions should be preserved, and new options should be permitted.
  • The end-state system should rely on strong, transparent regulation and private capital (including primary-market credit enhancement such as mortgage insurance [MI] and lender recourse, or other available forms of credit risk transfer) primarily assuming most of the risk.
  • While the system will primarily rely on private capital, there should be a provision for a deeper level of government support in the event of a systemic crisis.
  • There should be a “bright line” between the primary and secondary mortgage markets, applying to both allowable activities and scope of regulation.
  • Transition risks to the new end-state model should be minimized, with special attention given to avoiding any operational disruptions. (3-4)

This set of principles reflect the bipartisan consensus that had been developing around the Johnson-Crapo and Corker-Warner housing reform bills. The ten trillion dollar question, of course, is whether the Trump Administration and Congressional leaders like Jeb Hensarling (R-TX), the Chair of the House Banking Committee, are going to go along with the mortgage finance industry on this or whether they will push for a system with far less government involvement than is contemplated by the MBA.

What Is at Stake with the FHA?

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The Hill published my column, The Future of American Home Ownership Under President Trump. It reads, 

One of the Trump Administration’s first official actions was to reverse the Federal Housing Administration (FHA) mortgage insurance premium cut that was announced in the last days of President Obama’s term.  This is a pretty obscure action for Trump to lead with in his first week in office, so it is worth understanding what is at stake with the FHA and what it may tell about the future of homeownership in the United States. 

The FHA has roots that stretch back to the Great Depression.  It was created to provide liquidity in a mortgage market that was frozen over and to encourage consumer-friendly practices in the Wild West mortgage and home construction markets of the early 20th century.  It was a big success on both fronts

After the Great Depression, the federal government deployed the FHA to achieve a variety of other social goals, such as supporting civilian mobilization during World War II, helping veterans returning from the War, stabilizing urban housing markets during the 1960s, and expanding minority homeownership rates during the 1990s. It achieved success with some of these goals and had a terrible record with others, leading to high rates of default for some FHA programs.

In the last few years, there have been calls to significantly restrict the FHA’s activities because of some of its more recent failures. Trump’s policy decisions for the FHA will have a big impact on the nation’s homeownership rate, which is at its lowest in over 50 years. This is because the FHA is heavily relied upon by first-time homebuyers.

We do not yet have a good sense of how President Trump views the FHA because he had very little to say about housing policy during his campaign. And his choices to lead the Department of Housing and Urban Development, Ben Carson, and the Treasury Department, Steven Mnuchin, had little to add on this subject during their Senate confirmation hearings.

The 2016 Republican Party Platform does, however, offer a sense of where we might be headed: “The Federal Housing Administration, which provides taxpayer-backed guarantees in the mortgage market, should no longer support high-income individuals, and the public should not be financially exposed by risks taken by FHA officials.”

This vague language refers to two concrete policies that have their roots in actions taken by the FHA during the Bush and Obama administrations. The reference to the support given to “high-income individuals” refers to the fact that Congress significantly raised FHA loan limits starting in 2008, so that the FHA could provide liquidity to a wider swath of the mortgage market. The GOP is right to question whether that the FHA still needs to provide insurance for $500,000 and more mortgages now that the market has stabilized.

The GOP’s statement that taxpayers “should not be financially exposed by risks taken by FHA officials” refers to the fact that the FHA had a lot of losses as a result of the financial crisis. These losses resulted in the FHA failing to meet its statutorily-required minimum capital ratio starting in 2009. In response to these losses, the FHA increased the mortgage insurance premiums it charged to borrowers.

While the FHA has been meeting its minimum capital ratio for the last couple of years, premiums have remained high compared to their pre-crisis levels. Thus, the GOP’s position appears to back off from support for homeownership, which has been a bipartisan goal for nearly 100 years.

The FHA should keep its premiums high enough to meet its capital requirements, but should otherwise promote homeownership with the lowest premiums it can responsibly charge. At the same time, FHA underwriting should be required to balance access to credit with households’ ability to make their mortgage payments over the long term. That way the FHA can extend credit responsibly to low- and moderate-income households while minimizing the likelihood of future bailouts by taxpayers.

This is the most responsible way for the Trump administration to rebuild sustainable homeownership for a large swath of Americans as we recover from the brutal and compounding effects of the subprime crisis, financial crisis and foreclosure crisis.

HUD, Exit Stage Left

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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.

Mortgage Moves in 2017

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MortgageLoan.com quoted me in Three Mortgage Moves o Consider in 2017. It opens,

How much do you think about your mortgage? Probably not much at all.

But financial professionals say that homeowners can save money, lower the amount of interest they pay each year and maybe free up some extra cash, all by tweaking their mortgages, whether they are paying off a conventional loan, FHA mortgage or VA loan.

If you’ve gotten into the habit of ignoring your mortgage, it’s time to take a look at what is probably your biggest financial obligation. Here are three suggestions from mortgage lenders and financial pros to use your mortgage to better your finances in 2017.

Going Short-Term

Are you paying off a 30-year, fixed-rate mortgage? It might be time to refinance that loan, not for the benefit of lower interest rates but to turn your mortgage into one with a shorter term.

Turning your loan from a 30-year version to a 15-year one will result in a higher monthly mortgage payment. But you’ll also dramatically reduce the amount of interest you’ll have to pay over the life of your loan. Mortgage rates with 15-year, fixed-rate loans are lower than the ones attached to longer-term loans, too.

“Going shorter term is a big financial benefit,” said Jason Zimmer, president of Lockport, Illinois-based Parlay Mortgage. “The 15-year loan is where you want to go. You can save so much money.”

Look at the financial difference: Say you are paying off a 30-year, fixed-rate mortgage of $250,000 at an interest rate of 4.09 percent. Your monthly payment, not including property taxes or insurance, will be about $1,200. But you’ll pay a total of $184,000 in interest if you take the entire 30 years to pay off your loan.

But say you now owe $225,000 on that same loan. If you refinance that amount to a 15-year, fixed-rate mortgage with an interest rate of 3.33 percent, your monthly payment, not including taxes and insurance, will jump to just under $1,600. But if you take the full 15 years to pay off this loan, you’ll only pay about $61,000 in interest, a huge savings from that 30-year loan.

“Lots of people don’t consider a 15-year, fixed-rate mortgage for a refinance because they knew they could not afford one when they bought their house in the first place,” said David Reiss, professor of law at Brooklyn Law School in New York City. “But if you have had your house for more than a couple of years, and your income has increased in the interim, refinancing into a 15-year, fixed-rate mortgage can be a great way to get a lower interest rate and pay a lot less interest in the long run.”

Dr. Carson’s Slim Housing Credentials

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photo by Gage Skidmore

Law360 quoted me in Carson’s Slim Housing Credentials To Be Confirmation Focus (behind paywall). It opens,

Dr. Ben Carson will face a barrage of questions Thursday on topics ranging from his views on anti-discrimination enforcement to the basics of running a government agency with a multibillion-dollar budget at his confirmation hearing to lead the U.S. Department of Housing and Urban Development.

Carson, a famed neurosurgeon and former Republican presidential candidate, was President-elect Donald Trump’s surprise choice for HUD secretary, given the nominee’s lack of experience or statements on housing issues. That lack of a track record means that senators and housing policy advocates will have no shortage of areas to probe when Carson appears before the Senate Banking Committee.

“I want to know whether he has any firm ideas at all about housing and urban policy. Is he a quick study?” said David Reiss, a professor at Brooklyn Law School.

Trump tapped Carson in early December to lead HUD, saying that his former rival for the Republican presidential nomination shared in his vision of “revitalizing” inner cities and the families that live in them.

“Ben shares my optimism about the future of our country and is part of ensuring that this is a presidency representing all Americans. He is a tough competitor and never gives up,” Trump said in a statement released through his transition team.

Carson said he was honored to get the nod from the president-elect.

“I feel that I can make a significant contribution particularly by strengthening communities that are most in need. We have much work to do in enhancing every aspect of our nation and ensuring that our nation’s housing needs are met,” he said in the transition team’s statement.

The nomination came as a bit of a surprise given that Carson, who has decades of experience in medicine, has none in housing policy. It also came soon after a spokesman for Carson said that he had no interest in a Cabinet position because of a lack of qualifications.

Now lawmakers, particularly Democrats, will likely spend much of Thursday’s confirmation hearing attempting to suss out just what the HUD nominee thinks about the management of the Federal Housing Administration, which provides insurance on mortgages to low-income and first-time home buyers; the management and funding for public housing in the U.S.; and even the basics of how he will manage an agency that had an approximately $49 billion budget and employs some 8,300 people.

“You will have to overcome your lack of experience managing an organization this large to ensure that you do not waste taxpayer dollars and reduce assistance for families who desperately need it,” Sen. Elizabeth Warren, D-Mass., said in a letter to Carson earlier in the week.

To that end, Carson could help allay fears about management and experience by revealing who will be working under him, said Rick Lazio, a partner at Jones Walker LLP and a former four-term Republican congressman from New York.

“The question is will the senior staff have a diverse experience that includes management and housing policy,” Lazio said.

One area where Carson is likely to face tough questioning from Democrats is anti-discrimination and fair housing.

Carson’s only major public pronouncement on housing policy was a 2015 denunciation of the Affirmatively Furthering Fair Housing rule that the Obama administration finalized after it languished for years.

The rule, which was part of the 1968 Fair Housing Act but had been languishing for decades, requires each municipality that receives federal funding to assess their housing policies to determine whether they sufficiently encourage diversity in their communities.

In a Washington Times, op-ed, Carson compared the rule to failed efforts to integrate schools through busing and at other times called the rule akin to communism.

“These government-engineered attempts to legislate racial equality create consequences that often make matters worse. There are reasonable ways to use housing policy to enhance the opportunities available to lower-income citizens, but based on the history of failed socialist experiments in this country, entrusting the government to get it right can prove downright dangerous,” Carson wrote.

Warren has already indicated that she wants more answers about Carson’s view of the rule and has asked whether Carson plans to pursue disparate impact claims against lenders and other housing market participants, as is the current policy at HUD and the U.S. Department of Justice.

Warren’s concerns are echoed by current HUD Secretary Julian Castro, who said in an interview with National Public Radio Monday that he feared Carson could pull back on the efforts the Obama administration has undertaken to enforce fair housing laws.

“I’d be lying if I said that I’m not concerned about the possibility of going backward, over the next four years,” Castro said in the interview.

HUD, as the agency overseeing the Federal Housing Administration, has also been involved in significant litigation against the likes of Deutsche Bank, HSBC, Bank of America and JPMorgan Chase & Co., among others, seeking to recover money the FHA lost on bad loans they sold to the agency.

“Will you commit to continuing to strictly enforce these underwriting standards in order to protect taxpayers from fraud?” Warren asked.

Carson has also drawn criticism from fair housing advocates for his views on the assistance the government provides to the poor, saying in his memoir that such programs can breed dependency when they do not have time limits.

To that end, housing policy experts will want to hear what Carson wants to do to ease the affordability crisis, boost multifamily building and improve conditions inside public housing units. HUD also plays a major role in disaster relief operations, another area where people will be curious about Carson’s thinking.

“I’d be looking at hints of his positive agenda, not just critiques of past programs,” Reiss said.