Trump, FHA Mortgages and Rethinking Discounts

Trump, FHA Mortgages & Rookie MistakesSpeaking from the Capitol at his inauguration, our new President said “for too long, a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost. Washington flourished, but the people did not share in its wealth.”

And then, within an hour, it was announced that a .25 percent reduction in the FHA’s annual mortgage insurance premium (MIP) set to start later this month would be suspended.  The last minute discount from the Obama Administration was expected to save new borrowers an average of $446 a year according to research from ATTOM Data Solutions.

It’s not clear if Trump himself even knew about the rollback. He was, after all, a little busy on Inauguration Day. Moreover, the HUD rate hike can be changed. The official announcement says “more analysis and research” are needed so maybe the matter will be reconsidered.

The Putin Ploy

The better option would have been to follow the lead of Vladimir Putin. In December the US tossed out 35 Russian diplomats because of hacking in the presidential election. Instead of retaliating — the expected counter-move — Putin did nothing and as a result the Obama penalties seemed weak and ineffective. No diplomatic tit-for-tat ensued.

In a similar sense, Trump would have been smart to continue the FHA discount. Instead, the new Administration handed a multi-billion dollar advantage to the private mortgage insurance industry, an industry that competes with the government’s massive FHA loan insurance program — a program which has insured more than 45 million loans.

FHA Mortgages

Let’s look at the numbers: In fiscal 2016 the FHA endorsed 1.25 million loans.  At that pace five million FHA loans will be issued during the next four years. For a borrower with a $185,000 mortgage the savings from the now-suspended .25 percent discount would have amounted to $1,733 during the first four years of the loan term. For five million FHA borrowers the suspension means additional costs valued at almost $8.7 billion — and more if loans are held more than four years.

Higher FHA costs make products from the private mortgage insurance industry — a special interest if ever there was one — artificially more competitive.

The now-suspended FHA discount could reasonably be expected to result in more home sales and that’s good for the housing sector, about 20 percent or so of the entire economy that Trump now runs. Our new President will no doubt discover that marginal borrowers trying to navigate the financial system wanted the discount to offset rising interest rates. Home sellers who want more competition for their properties — and thus more demand and perhaps higher prices — will agree fiercely that mortgage costs should be as low as possible. 

Cash-strapped state and local officials wanted the fee reduction because it leads to more home sales and higher real estate prices and thus additional transfer fees and bigger property tax collections. In Washington — where all politics are local and nothing is more local than real estate — a large number of Democrats and Republicans, some more quietly than others, are likely to push for a reinstatement of the fee reduction, especially when they hear from community bankers, real estate brokers, and local attorneys back home.

Trump has given a bargaining advantage to critics who will use the FHA rate-cut suspension to paint him as a billionaire penthouse owner in league with the DC special interests he promised to oppose. The people Trump most represents — the people who want change in Washington — will see the FHA decision as evidence that nothing is different, that the insiders are still inside.

If the new Administration is savvy it will favor a restored FHA premium cut before Memorial Day, in time to boost the home-selling season. A review by officials in the Trump White House can easily determine that FHA reserves are well-above required levels and that the people who voted for Trump deserve a better deal from Washington. Such thinking will lead to a new FHA discount — and maybe even a bigger FHA discount — one labeled and promoted as a Trump program to help mortgage borrowers nationwide.

That’s politics, and that’s Washington at work — when it works.

(Photo courtesy of Thomas Kelley)

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2 Comments on "Trump, FHA Mortgages and Rethinking Discounts"

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  1. Lets Get Real says:

    Lets not forget that FHA’s reserve ratio was well above the required reserve in 2008-2009, had nearly disappeared by 2010, and led to a $1.7B bailout in 2013. So the “extra” expense to new FHA borrowers, which is really that they pay the same fees every other FHA borrower has paid for the last couple of years, is for the benefit of all taxpayers.
    It was obvious that this cut was meant to put the new administration in a hard place. The timeline for the change was drastically faster than similar past changes, and they even changed the basis for determining which rate you get from your case number assignment date to the closing date. It seems like this was all designed to make the change effective as close to inauguration as possible.
    I think the change would have been great for my industry, but I see the logic of examining it further to ensure it makes sense for all Americans. Right now it does not seem like that was done. The disappointing part is this little political play by the exiting administration cost the mortgage industry millions of dollars in resources dedicated to making rush updates for this change and lost production on applications that were taken relying on the new rates that will now withdraw. If a mortgage company did something similar to this to its customers, they would be shut down.

  2. Real estate guy says:

    The Obama administration made several last minute moves in an effort to box Trump in on certain policies. Obama waited on many of these changes because it was not politically expedient to do them earlier. This was one of those moves. Trump is actually doing the responsible thing to determine whether the new rate is appropriate or irresponsible. Remember that the FHA insurance premium must cover each 30 year loan on a go-forward basis. As underwriting standards loosen and borrowers again are allowed to put almost no money down, there is a higher risk to taxpayers that the FHA might need another bailout. Remember, if Obama thought this was so smart and a no-brainer, he would have done this much earlier than his last week in office. Instead he put Trump in a no-win situation, having to choose between repealing the rate reduction or potentially letting the FHA get in trouble again. Let’s give the new administration a chance to figure out whether this rate reduction was appropriate or not.

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