The outgoing Obama administration gave a parting gift to future borrowers: a break on monthly mortgage payments. The annual mortgage insurance will be reduced by Federal Housing Administration (FHA). The mortgage will be 25 basis points less. According to the FHA, borrowers will save about $500 in 2017. The FHA is used by the US government to insure home loans taken by low down payment.
The insurance fund of the FHA played an important role in housing bailout. It provided borrowers the exclusive option of low down payment. Any borrower can put only 3.5 percent down on the home with mortgage backed by FHA. During the height of the housing crisis, circa 2008, almost one quarter of new loans were given FHA backing. This is now down to one-sixth of all housing loans. The bailout by the FHA put it in the loss making category for a number of years. However, a number of premium increases and strict underwriting leading to a total of 150 basis points put it back on track.
This move, predictably, has been met with disapproval from a few quarters. Jeb Hensarling, the Republican Representative and chair of House Finance, Services Committee, said that the last gift of the Obama administration to hardworking taxpayers involves putting them at more risk of footing bill for another bailout.
The insurance fund managed by the FHA gained $44 billion in terms of value from 2012. The agency’s capital ratio was also above the two percent level for about two years. This was acknowledged by Julian Castro, the Housing and Urban Development Secretary. He said that the FHA had enjoyed four consecutive growth years and has adequate reserves to meet future claims. It can now pass the savings to the working families. He added that this can be regarded as a fiscally responsible measure to price the mortgage insurance in such a manner which protects the insurance fund while preserving home-ownership dreams for all credit qualified borrowers.
This move has been praised by industry leaders. However, they suggest that more must be done to address concerns in housing market which have become increasingly expensive. Those who want to purchase homes for the first time are now struggling to make an entry into the present market. Steeper mortgage rates coupled with higher home prices have made homes almost unaffordable. FHA credit scores continue to be higher and underwriting remains tight.
According to David Stevens of Mortgage Bankers Association, reducing the expense of FHA loans benefits the borrowers, but a number of other changes are needed to reduce lenders’ uncertainty and refresh the FHA program.