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Layman’s Analysis: FHA Premium Cut Halted by Trump

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Move Designed to Head Off Future Problems

WASHINGTON (AaronLayman.com) – Well that didn’t take long! The proposed FHA premium reduction has been halted by the Trump administration. Mortgageee Letter 2017-07 was issued within hours of Mr. Trump being sworn into office. The scheduled 25-basis point premium cut was slated to take effect January 27, a parting gift of the outgoing administration. The FHA premium reduction appeared ill-timed and more of a knee-jerk reaction to the recent spike in rates. Of course the housing industry is never one to waste an opportunity to juice sales, so many mortgage loan officers had cheered the news.

The Mortgage Bankers Association was quick to respond to the news, reaching out to the new administration. I can see both sides of this argument, but the unfortunate truth is that the FHA premium reduction was indeed ill-timed, particularly when we are already dealing with an echo-bubble in housing. FHA loans have been getting more risky, not less, because the inflated nature of house prices across the country puts more marginal borrowers at risk of being upside down on their home.

Any rational real estate practitioner should be able to understand this basic point. When house prices are outpacing incomes, the solution is not to inflate the price of homes even further. This is part of the problem with FHA loans, which have been loosening their restrictions, attempting to keep borrowers within reach of inflated home prices. This piece from summer of 2016 explains the giddiness of the housing gurus, as FHA loans were getting approved at increasing rates even before the premium reduction was proposed.

This would suggest that premium reductions were not needed. What is concerning is the fact that FHA only requires a 3 and a half percent down payment to begin with. FHA rates are often lower than those for conventional buyers putting 20% down because of the government subsidy, and applicants only need a 580 credit score to qualify. When things go south, and they eventually will, taxpayers will be on the hook for the losses when those marginal borrowers default on the loans. The FHA program received a $1.7 billion injection (aka bailout) back in 2013, a lingering result of the last housing collapse.

The FHA previously cut premiums back in 2015, sparking a big jump in the share of FHA-backed loans. The share of FHA loans is still hovering above longer-term averages. Not surprisingly, the 2015 premium reduction also spurred home price increases, thereby reducing home affordability and the stated objective of the premium reductions.

I welcome the halt to the FHA premium cut. I think it was a poorly-timed gimmick. The FHA program is already stretching “affordability” too far and inflating the prices of homes. It will be interesting to see if the new administration is equally concerned about another problem plaguing the U.S. housing market, that of money laundering by foreign nationals into U.S. homes. This is another big problem with artificial house price inflation, one that will likely to continue be hidden from the public view.

The post Layman’s Analysis: FHA Premium Cut Halted by Trump appeared first on Covering Katy News.

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