Hold Off on That FHA Insurance Premium Reduction

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Filed under: Market Comentary

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A couple weeks ago, you might recall reports indicating that HUD was reducing the premiums charged for mortgage insurance by 0.25% beginning on January 27, 2017.

For now, that plan has been suspended.

Among fears that HUD may not have adequate reserves to support this premium reduction, Ben Carson, the Trump administration’s head of the housing agency, told a Senate committee that the reduction had to be further evaluated.

The rate cut has been put on hold, which means it could happen in the future, just not as soon as we had thought.

Here’s what’s important for us to understand…

1.  The insurance premium reduction (or absence of one) has no effect on current homeowners.
2.  This decision only impacts future FHA buyers, but in reality, not that much.  Things are staying exactly the way they have been for years now.
3.  The insurance premium reduction (or absence of one) has no effect on interest rates.
4.  The decision will have no impact on buyers who were previously approved for FHA financing using the original factor for mortgage insurance.

Also, it is important to know that FHA insures about 16% of all mortgages in the United States.  So while the vast majority of home buyers do not use FHA-backed financing, FHA is still “on the hook” if you will, for billions of dollars in mortgages.  The public’s knee-jerk reaction to lower insurance premiums is all positive, but we must also remember that lowering the premiums adds a layer of risk to FHA.  In the event of a housing bubble, as we’ve seen in the past, insufficient reserves on the part of FHA could mean big risk for tax payers who ultimately would end up bailing out the agency.

So at the end of the day, there is nothing wrong with being cautious about this decision and none of us are any worse off than we were just a few months ago prior to the initial announcement being made.

I will keep you up to date as this story further develops.

If you have any questions or would like to discuss this situation, feel free to contact me.

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