Will Trump Make the FHA More User Friendly?
the trump administration wants to roll back the rules and regulations to strengthen the economy and the housing market.
“These policies will unshackle our economy and create and sustain high-paying jobs so that more Americans have the resources and freedom they deserve to fulfill their American dream,” President Trump said in a proclamation issued last month.
One way to increase homeownership is to make U.S government-backed mortgages more accessible to new homebuyers.
But that is not so easy when inventory of new and existing homes is so tight. And lenders are only starting to ease up on credit standards.
At a Department of Housing and Urban Development-sponsored housing forum last month, Secretary Ben Carson noted that the Federal Housing Administration has a “strong role to play” in the housing market. “An estimated 40% of firsttime borrowers use FHA.”
However, first-time buyers are typically less creditworthy than repeat buyers. And they are generally more dependent on FHA financing, as opposed to loans guaranteed by Fannie Mae and Freddie Mac.
The FHA tolerates lower credit scores and higher debt-to-income ratios than Fannie and Freddie. It also allows down payments as low as 3.5%. The average loan-to-value ratio for a first-time FHA borrower is 95.5%. For Fannie and Freddie first-time borrowers, the average LTV ratio is 86.5%, according to the Urban Institute.
The FHA’s gateway to homeownership could be wider if the Trump administration takes actions to reduce mortgage insurance premiums and clarify lender penalties under the False Claims Act.
The FHA’s financial condition has improved over the past few years. And the FHA could lower its upfront fee from 85 basis points to 60 basis points, as proposed by the Obama administration.
The premium reduction was due to go into effect Jan. 27 but it was placed on hold by the new Trump administration. Carson did not mention an FHA premium reduction in his remarks at the housing forum.
The National Association of Realtors “believe FHA insurance premiums can come down a bit because it has surpassed its capital reserve requirement,” according to NAR Chief Economist Lawrence Yun.
Yun also stressed that it will be important to increase the supply of new homes to “tame house price growth and make housing more affordable to middle-class, first-time homebuyers.”
Over the past five years, home values have risen 40% while wages only by 10%. “We need to ensure there is an incentive for the homebuilders to build starter homes, more affordable homes,” Yun said.
For the FHA to increase its market share significantly, the new administration “needs to create and enforce a clear and fair set of rules for lenders,” according to Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute.
“Triple damages under the False Claims Act have to be re-examined,” she said.
The current approach to the enforcement of the False Claims Act has been a significant deter- rent for depository institutions doing FHA loans.
FHA lenders have become cautious in their underwriting practices due to the huge penalties the Obama Justice Department levied on banks and nonbank mortgage lenders for alleged violations of the False Claims Act.
Many banks stopped originating FHA loans due to the uncertainty surrounding the False Claims Act litigation. Today, nonbanks “originate 38% of all mortgages and an amazing 75% of FHA loans,” according to a report by the investment banking firm Keefe, Bruyette & Woods.
Mayer Brown partner Laurence Platt told NMN that False Claims Act litigation continues to pose a threat to lenders.
“There are still False Claims Act cases out there and we’re involved in a bunch,” he said in an interview.
“We have had a couple of new ones, too. The Justice Department hasn’t gone away,” the Washington attorney added. “Hopefully the new administration will be a little bit more business friendly.”