New homeowners applying for FHA loans may soon be treated to a pleasant surprise. The White House announced plans to lower mortgage insurance premiums (MIPs) on FHA-backed mortgage loans from 1.35% to 0.8%. This applies to both first-time homebuyers and existing homeowners who refinance via FHA loans.
FHA loans offer down payments as low as 3.5%, but they require two forms of mortgage insurance – upfront MIP, a single upfront payment of 1.75% of your mortgage that is added to the loan balance, and annual MIP, currently a regular payment of 1.35% annually that is divided up throughout the year and added to your monthly mortgage payment. The President’s action only applies to annual MIP.
In essence, the President is returning things back to normal. The annual MIP rate was raised from 0.8% to 1.35% during the housing crisis to stave off massive losses to the Mutual Mortgage Insurance (MMI) fund. MMI provides the FHA’s insurance to banks through funds received by MIP payments, and it does not operate with any taxpayer support.
MMI’s ledger has returned to the black, and has enough funding to warrant a return to lower rates beginning in February, according to Julian Castro, the Secretary of Housing and Urban Development (HUD). There are some concerns that FHA does not yet have sufficient capital reserves to meet its mandated 2.0% threshold (and is not expected to until late 2016), but the assumption is that a interest rate cut will bring in enough new homeowners to increase total funds even with the lower rate. (Sounds like a familiar argument….)
HUD and the White House estimate that the action will save around $900 annually on average to qualifying homeowners, while Sam Khater, the Chief Economist at CoreLogic, assumes an average around $960 ($80/month). In pricey real estate markets like California, where FHA loans represent 15% of the housing market, the average savings should be around $2,000, according to former FHA Commissioner David H. Stevens. Jay McCanless, an analyst with Sterne Agee, takes a more pessimistic view and suggest that savings will be only $25 a month for the riskiest mortgages, or $300/year.
It is possible that this action could be derailed before it starts, as there is some argument about whether it requires Congressional approval or not. The phrases “executive order” and “executive action” have been used interchangeably to describe the FHA action, but they are different.
Executive orders are formal directives, legally binding, and included in the Federal Register. Executive actions are just expressions of the President’s desire to set a particular policy – yet the agency involved is expected to follow the new rules in either case.
What is the practical difference? Without a challenge, there really isn’t much of one – but rest assured there will be a challenge from the new Republican Congress. That challenge could be through the courts or by passage of legislation negating the action. In either case, the burden is on the Congress or the courts to act to change direction.
The HUD press release only uses the work “action”, not order. It appears to us to be an executive action, so keep an eye out for any challenge throughout 2015.
The President and FHA/HUD officials expect this action to spur more new home buying and provide some lift to the lackluster housing market. Is this likely to occur? There is debate about what the actual effect is likely to be.
HUD predicts the action will “spur 250,000 homebuyers to purchase their first home over the next three years.” The National Association of Realtors (NAR) agrees, projecting 234,000 home sales from creditworthy buyers who were priced out of the market due to high insurance premiums. McCanless, however, assumes 15% growth in single-family starts regardless of the effect of MIP. While Khater believes the impact on sales is minimal because other factors dominate the decision to buy, and that changes such as this only affect the size of the house homebuyers can afford.
Most analysts predict stronger housing growth in 2015 due to continuing low interest rates and steady improvement in the broader US economy. Others, however, are less sanguine, noting that millennials have not yet bought into the American Dream of home ownership — and may never do so, thus reducing the pool of buyers. Moreover, an expected interest rate rise, flat wage growth, and continuing tight credit may lead to decreasing affordability that a simple MIP adjustment cannot overcome.
If HUD and the NAR are right, and a quarter-million more homes are purchased over the next three years, the indirect impact on the broader economy should be significant. This so called “multiplier effect” will stimulate growth in other industries — ranging from lumber to appliances to furniture, landscaping, and more. The value of this multiplier effect is generally estimated to be in the range of 1.3 to 1.6 times the value of the home sales home sales.
With continuing strong growth in GDP, real improvements in the labor market — including wage growth at last — and a stock market at historic highs, many see this spur to housing as one more positive development in a generally brightening US economy. Not everyone agrees with this rosy outlook, of course, but MoneyTips thinks the President’s action will bring a few hundred thousand new creditworthy buyers into the housing market, and that there will be a positive ripple effect for other industries.
Because of its limited scope, this is not a game-changing action. However, it does represent more positive momentum for the rapidly improving US economy.