Published in Housing Wire
I was in the audience at Central High School in Phoenix, AZ, last week where President Obama announced that the Federal Housing Administration will reduce the price of its mortgage insurance by 0.50 percent and help more Americans realize their dreams of homeownership.
The news was met with cheers and applause from the auditorium filled with residents of a city hit hard by the housing crisis and Great Recession.
I joined in with their excitement because I know that the policy will help normalize the national housing market and make it easier for first-time and underserved borrowers to buy homes while protecting taxpayers from the risky lending practices that led to the crash.
REALTORS® support responsible lending to qualified buyers; this is essential for building strong communities.
This mortgage insurance reduction is not about repeating the mistakes of the past, in which underqualified buyers received loans they could never repay. This 0.5% reduction is a good balance – it is the right policy at the right time.
The FHA’s mortgage insurance premiums had become so expensive that last year alone, roughly 234,000 creditworthy borrowers were priced out of the market. Thankfully, the Administration recognized the short-sightedness of shutting these buyers out and will lower the fees without putting its funds at risk.
Economists at the National Association of REALTORS® estimate that the fee reduction will price in an additional 1.6 million to 2.1 million renters along with many trade-up buyers, resulting in 90,000 to 140,000 additional annual home purchases based on the standard affordability limits at the FHA and conventional market and dynamics in the housing finance market.
More affordable FHA loans will have a positive impact on first-time buyers who have been entering the market at a lower than normal rate. Over the past four years, as the fees increased, the percent share of first-time buyers using FHA-backed loans shrank from 56% to 39%.
The increase in the volume of borrowers who acquire FHA loans as a result of the fee reduction will ultimately strengthen the FHA, the agency that has insured more than 37 million home loans since its inception in 1934. NAR economist Ken Fears writes in a recent blog post that, “By modestly reducing rates and expanding the pool of borrowers, the FHA is still on trajectory to meet its capital requirement over a modestly longer horizon, while reducing the amount that it charges borrowers beyond the cost of the program.”
Fears concludes in his blog post that:
The FHA’s proposed changes to its pricing for 2015 are good for consumers and the economy. It puts money back into consumers’ pockets, improves affordability for many borrowers, and unlocks the opportunity to purchase a home for tens of thousands, while preserving the stability of the FHA’s fund and protecting tax payers. Sluggish income growth, low inventories and nagging tight credit remain headwinds for the market, but this shift is an important bell weather of returning health for the market.
The President’s new policy is not the silver bullet solution that will automatically complete the housing recovery, but it’s an important step that will normalize the market.