Almost lost amid all the celebrating and marching this weekend were a set of official actions the Trump administration took soon after the Inauguration. One directly impacts some consumers who are house-hunting right now.
You might have seen headlines suggesting President Donald Trump raised taxes on middle-class homeowners, but that’s not an accurate way to portray what happened. Instead, Trump signed an administrative order to halt a fee rate cut, announced just days earlier by the Obama administration, that would have saved homebuyers who don’t have big down payments and use Federal Housing Administration-backed home loans an average of about $450 annually in their monthly house payments.
The order will make home loans more costly for a large group of buyers — about 40% of millennial buyers use the program targeted by the Trump order. That, in turn, can make life harder on older owners looking to sell their homes and trade up.
What Really Happened
In the hours after he was sworn in, Trump signed an order that stopped a lame-duck step by the Obama administration that would have lowered monthly fees for consumers who buy homes with less than 20% down payments and use a government program operated by the Housing and Urban Development department known as “FHA loans” to insure their mortgages. The decrease would have saved average homeowners about $37 monthly, according to Attom Data Solutions. It would have saved homeowners much more in places where home prices are higher — averaging more than $1,000 annually in 13 counties across the United States.
FHA loan fees were raised during the recession to cover program losses, and Obama’s move would have returned them to about the level they were before the housing bubble burst. For now, they remain above their 2008 levels.
Keeping the fees higher effectively lowers the buying power of home shoppers, as money that could be spent toward mortgage payments is instead shifted to insurance payments.
Help For Less-Liquid Homebuyers
Many homeowners are familiar with the additional fees that come with low-down-payment mortgages. Buyers with less than 20% generally must pay for mortgage insurance in case they cannot make their mortgage payments. That’s because the owners will have so little equity in their homes that banks can’t be sure they’d make their money back if they foreclosed on the home and sold it.
There are several forms of this kind of insurance; the most popular is provided by the Federal Housing Administration through FHA-backed loans. For an upfront fee and an ongoing monthly cost, the FHA will guarantee a loan between a buyer and a bank — that gives banks the ability to lend money to buyers with as little as 3% down.
The program dates back to the 1930s, and helps create first-time homebuyer activity. The FHA has insured 34 million properties since its inception, and the agency says it is the largest insurer or mortgages in the world.
Low-down-payment buyers can opt for private mortgage insurance, or PMI, instead. PMI tends to be less expensive, but buyers with lower credit scores or smaller down payments might not qualify for it.
Without these kinds of insurance programs, a buyer shopping for a median-priced $185,000 home would need at least $37,000 in a cash down-payment to buy a home, or would be required to finance the down payment some other way.
Younger Buyers Could Be Hit Hardest
FHA loans are particularly popular with millennials; 38% of new loans closed by younger buyers are FHA loans, according to mortgage data firm Ellie Mae.
FHA insurance isn’t cheap. At closing, buyers pay 1.75% of the loan in an upfront fee. For a $185,000 mortgage, that’s an extra $3,238 in cost; it’s usually financed as part of the loan. The ongoing monthly fee on that mortgage is about $126 per month — a rate of .085% of the loan annually, paid in monthly installments. The fee is known as the MIP, or mortgage insurance premium. The MIP was targeted by Trump’s order.
In the waning days of the Obama administration, the FHA announced it would drop the fee from 0.85% to 0.60% — a 0.25% drop. That would have provided $37 in monthly savings for a buyer with a median-priced home, or about $446 annually, Attom says. An FHA buyer in Santa Clara County, California, would have saved much more— $1,448 annually.
The fees collected from consumers go into the fund used to support the FHA loan program.
Before the recession, ongoing FHA fees were 0.55%. Not surprisingly, the FHA fund collapsed in the face of massive defaults during the collapse of the housing bubble. To restore the fund, FHA fees were raised steadily, beginning in January 2008, reaching a high of 1.35% in January 2013.
When the fund reached Congressionally-mandated reserve levels, the premiums were reduced, down to 0.85% in January 2015
A drop that would have returned FHA monthly fee levels to their 2008 levels, announced Jan. 9, was set to take effect on Jan. 27.
On the eve of HUD nominee Ben Carson’s confirmation hearings, Financial Services Committee Chairman Jeb Hensarling, R-Texas, was critical of the fee cut.
Greater Risk of Another Bailout?
“It seems the Obama administration’s parting gift to hardworking taxpayers is to put them at greater risk of footing the bill for yet another bailout,” Hensarling said. Carson then said he would “really examine” the premium cut at his hearing.
Daren Blomquist, senior vice president at ATTOM Data Solutions, says the rate cut two years ago triggered a short-term jump in home sales to FHA buyers. On the other hand, the impact of the rate cut wasn’t as dramatic as hoped, in part because fast-rising prices gobbled up much of the anticipated increased buying power.
“This decision not too surprisingly reflects the Trump administration’s fiscally conservative philosophical bent, favoring not putting taxpayers at risk — or at least what they perceive as risk — for the sake of a government program that helps people buy homes,” Blomquist said to me. “This is not to say that the Trump administration won’t take policy steps to help the homeownership rate rebound, but the levers pulled will more likely involve trying to allow the market to address the situation with deregulation rather than addressing the situation through government programs that potentially put taxpayers at risk.”
When asked for comment on why the fee cut was suspended, a HUD spokesperson directed Credit.com to its letter announcing the move.
“FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers,” it reads. “As such, more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions in an ever-changing global economy that could impact our efforts.”
Buyers might be tempted to wait and see what the Trump administration does with FHA fees — some observers think they could ultimately be lowered — but that might be a mistake. If home prices continue to rise, those increases would quickly eat up any savings from lower FHA fees. You can learn more about getting a mortgage (and buying a home) here.