Decision cancels mortgage insurance cuts
HUD move to cancel mortgage insurance rate cut to cost average county FHA borrower $540 a year.
In the waning days of the Obama administration, the U.S. Department o f Housi n g a n d Ur b a n Development announced a plan to cut mortgage insurance costs for homeowners with Federal Housing Administration loans.
And in the opening hours of the Trump administration, HUD, which is slated to be led by Palm Beach Gardens resident Ben Carson, reversed course.
The rate cut would have saved $540 a year for the typical FHA borrower in Palm Beach County. But, with memories of the mortgage meltdown still fresh, Congressional Republicans worried that the move would shift risk from private borrowers onto taxpayers.
Because FHA loans are easy to qualify for, they’ve become a staple for first-time buyers. FHA loans require down payments of only 3.5 percent (compared with 20 percent for the standard mortgage), and they’re offered to borrowers with credit scores as low as 580 (well below the 740 level required for most Fannie Mae and Freddie Mac loans).
The downside? Borrowers must pay hefty premiums for mortgage insurance, coverage that protects the lender in the event of default. Hence HUD’s announcement this month that it would shave 0.25 percent from mortgage insurance premiums starting Jan. 27.
According to an analysis by ATTOM Data Solutions, the typical FHA borrower in Palm Beach County has a loan of $216,000. The 0.25-point cut would have saved that borrower $540 a year.
Because of the high mortgage insurance costs, FHA borrowers often aim to boost their credit scores and build enough equity to refinance into a cheaper loan.
What did the Trump administration do?
The administration stopped a rate cut that the Obama administration had announced two weeks earlier. The rate cut was scheduled to take effect Friday, so no one received a loan with the new, lower insurance rates.
What does this mean for me?
If you are shopping for a home and planned to use an FHA-backed loan, you will pay the same premium rate for required mortgage insurance that you would have since January 2015.
For most borrowers getting an FHA-backed loan that means that after paying an upfront insurance fee, you will pay 0.85 percent of your loan amount for premiums each year. The Obama administration had planned to drop that rate to 0.60 percent.
How many people use FHAbacked loans?
During the federal government’s 2016 fiscal year, the FHA insured 1.26 million purchase loans and refinances for single-family homes. Nearly 880,000 of those were purchases, worth more than $171 bil- lion. In the second quarter of 2016, FHA-backed loans accounted for 16.6 percent of single-family home loans, according to HUD.
Why did the Obama administration cut rates?
It argued that FHA could easily withstand a cut to premiums, saying the agency’s finances had vastly improved since it received its first bailout in 2013.
The $1.7 billion bailout from the U.S. Treasury was given to cover potential losses on the huge volume of low-down-payment mortgages FHA insured from 2007 to 2009 after the collapse of the subprime industry.
Why did the Trump administration suspend the rate cut?
Some officials expressed concern that the rate cut could cost taxpayers if the loans started to go sour and the FHA was unable to cover the losses with less money coming in from premiums.