With FHA rate cut off, Trump's policy for housing blurry

An hour after Donald Trump took the oath of office last month, his administration caught the attention of the real estate industry when it abruptly suspended a planned cut in Federal Housing Administration mortgage-insurance premiums.

The Department of Housing and Urban Development cited the need for further analysis to protect taxpayers in halting the policy that would have saved FHA borrowers as much as $1,000 or more a year.

But the move by the FHA's parent agency, which overturned a decision the Obama administration had made on its way out the door, could signal something else: a new conservative bent to the nation's housing policy.

Guy Cecala, publisher of Inside Mortgage Finance, which tracks the residential mortgage market, noted that past administrations have tweaked the premium rate as they sought to either draw more people into the program or drive them away.

"Over the years probably half the changes in the program have been political," he said.

And there could be more ahead. Trump's nominee for HUD secretary, Ben Carson, during his confirmation hearing a week before the inauguration, signaled in an exchange with a Republican senator that he might be open to some housing policy changes.

"Taxpayers are on the hook for $1.2 trillion worth of mortgages," said Sen. Pat Toomey, R-Pa., referring to the total volume of FHA-backed home loans. "All the while there is a private industry in the business of insuring mortgages."

Carson, in response, said it didn't matter what particular entity provides insurance, but there has to be some sort of "backstop."

The FHA, created during the Great Depression when homebuilding had almost ground to a halt, is such a backstop.

To encourage more lending, the agency provides insurance to approved private lenders in the case of default.

In general, borrowers who are able to make a down payment amounting to 20 percent of a home loan don't need mortgage insurance, and for those who can't pony up that amount of cash but have good credit, cheaper insurance from private companies is often available.

But the FHA, with its mission to increase homeownership, is often a preferred option for cash-poor, first-time homebuyers and those with spotty credit -- or a combination of both.

Down payments can be as little as 3 percent to 5 percent of the purchase price, and the program is open to borrowers with credit scores as low as 500, which could signal a past bankruptcy or debts sent to collection.

Despite the generous underwriting standards, the mortgage insurance premiums covered defaults and fully funded the FHA for decades -- until it received its first taxpayer bailout in 2013 because of fallout from the housing bust. Since then, the agency's finances have improved significantly, though that hasn't assuaged concerns of some Republicans.

Shortly after the election, Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, pointed to a bill his committee passed in 2013 as the "right vehicle for reform" of the nation's housing finance system.

That bill, known as the Path Act, would have raised the minimum down payment for FHA mortgages to 5 percent for borrowers who are not first-time homebuyers.

Beyond that category, it would have limited program access to low- to moderate-income Americans and applications within a disaster area or during a "counter-cyclical market," as defined by the government. The bill also would have tightened requirements on borrowers who had previous foreclosures.

"The Path Act shifts risk away from the taxpayers and into the private sector by reducing FHA's footprint and making sure the agency is complementing the private sector, not competing with it," Hensarling said shortly after the bill passed the House Financial Services Committee in 2013.

The bill didn't move forward during the 2013-14 congressional session -- a time when Republicans controlled only the House.

"Given that Republicans [now] control both the House and Senate, not to mention the White House, I don't think it is a stretch to say there is a fairly decent chance that something like the Path Bill becomes law," Cecala of Inside Mortgage Finance said in an email.

Currently, most borrowers getting an FHA-backed loan pay a one-time, upfront premium of 1.75 percent of their loan, plus an annual premium (paid monthly) that is 0.85 percent of the original loan. The fees can add up.

For a borrower putting 3.5 percent down on a $200,000 loan, that amounts to an upfront cost of $3,500 and $142 in monthly premiums. That totals about $17,000 in mortgage insurance premiums after just 10 years.

The Obama rate reductions would have lowered the annual premium rate for most borrowers to 0.60 percent and saved $500 a year for borrowers who put down less than 5 percent on a $200,000, 30-year mortgage.

For a $600,000 loan in higher-cost markets, savings would be $1,500 annually.

But despite the costs, the FHA -- even without the Obama rate cut -- tends to be cheaper than private mortgage insurance for borrowers with poor to fair credit who can't make down payments of even 5 percent, said Richard Cirelli, a Laguna Beach, Calif., mortgage broker.

What's more, some repeat and wealthier buyers with credit problems have a hard time qualifying for non-FHA loans, said Jeff Lazerson, another Southern California mortgage broker.

If the Path Act became law, he said, "it would knock out a lot of people -- period."

But any significant change that would make FHA-backed mortgages less attractive or available would probably cause blowback from the real estate industry, including the 1.2 million member National Association of Realtors.

The group strongly opposed the Path Act in 2013, saying the proposed changes to FHA, as well as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., which support the conforming loan market, would "jeopardize the ability of American families to purchase a home, as well as the future of the housing industry itself."

The Realtors also called on the Trump administration to reverse its decision on the recent rate cut for borrowers.

Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles, said he expects the administration will have a conservative tilt in housing policy, but he noted that it's uncertain how the debate over housing policy will play out.

"Ben Carson is a complete unknown in the housing world," he said.

Business on 02/17/2017