FHA reduces mortgage insurance premium by 30%

The Federal Housing Administration will reduce its mortgage insurance premium by 30 basis point. This is a decision that many stakeholders feel is long overdue. Homebuyers will see an average annual savings of $800. Since the beginning of the year, stakeholders in the housing industry have been urging the administration to lower premiums. They believe that this would make the FHA’s program less expensive for homebuyers. FHA borrowers must have mortgage insurance, regardless of their down payment amount. The administration has been reluctant to reduce premiums in the past two years, citing high delinquency rates, and uncertainty about the budget for the next fiscal. In December, Congress approved a final spending bill for 2023 that provided $61.8 billion to HUD, which is $8.1 billion more than the enacted levels in 2022. This makes a premium cut more feasible, especially considering the rise in mortgage rates in the past year. This will result in savings of $65 per month on an average FHA loan of $260,000, according to Stevens. He said that this move could not have come at a better time. The FHA’s decision was welcomed by trade groups and lenders. “This will especially help minority homebuyers and low-and moderate-income households who are predominantly served by FHA loans,” wrote Bob Broeksmit, CEO of the Mortgage Bankers Association.Executive director of the Community Home Lenders of America Scott Olson, who has been lobbying for over two years for the administration to reduce premiums, noted how crucial the cut would be in today’s tough market. Olson stated that the FHA premium cut was a long-standing priority of CHLA. However, not everyone applauded the announcement. The American Enterprise Institute, a Washington D.C.-based conservative think tank, called this move “pointless.” “Tobias Peter (AEI’s assistant Director) wrote that FHA’s premium reduction and Federal Housing Finance Agency’s risk-based pricing guidelines published late in the year are attempts by housing authorities to increase first-time homebuyers, but that these initiatives are likely fail – just like they did nearly a decade ago. Peter wrote that FHFA had previously imposed credit loosening on GSEs in 2014. FHA responded quickly with a large 50-bps MIP cut. FHA had predicted that this cut would result in 250,000 new first-time home buyers over the next three year period and save each FHA buyer $900 per year. We found that home prices rose by 2.5 percentage points. FHA neighborhoods saw a faster increase in home prices and only 17,000 first-time buyers were introduced to the market. This is far below FHA’s prediction. Peter said that the market conditions are not favorable for a MIP reduction and that a premium cut would be absorbed into higher prices and make it more difficult to afford. The AEI recommends that HUD not cut the premium. Instead, it should “focus on helping disadvantaged borrowers” and “tie any premium reduction to shorter terms.”