Obama Lowers the FHA’s Mortgage Premiums

On Thursday, January 8, President Obama officially announced that the Federal Housing Administration will reduce premiums on FHA mortgages. Almost immediately, Republicans denounced the decision, pointing out the FHA’s fund is below its statutory minimum. Supporters, however, argued that lowering the insurance rates could give thousands the opportunity to buy their own homes, which could benefit a number of areas where recovery from the housing crisis has been slow. But how will the premium cut affect the United States as a whole, and what does it mean for the American people?

Currently, homeowners who take out an FHA mortgage pay 1.35% of the loan amount every year, a cheaper rate than many other options in the U.S. Under the proposed cut, however, borrowers would pay 0.85% of their loan amount, meaning a homeowner with a $200,000 FHA mortgage would move from paying $2,700 to $1,700 if they refinanced under the new rate. This change follows a recent reduction of the FHA’s already low down payments. While the amounts vary from state to state, experts have said that some residents in places like Florida have seen their payments drop from $417,000 to $285,000.

According to the Housing and Urban Development Secretary, Julian Castro, the new loan premiums could benefit a projected 800,000 borrowers per year. Additionally, more than 100,000 current homeowners are expected to refinance their loans this year to take advantage of the lower prices. Because of these factors, analysts suspect that spring home buying and building could see a needed boost across the U.S.

However, Republican lawmakers aren’t so sure. After Obama announced the change in a speech in Phoenix, AZ, a number of politicians responded by arguing that the reduction could spark another housing crisis, especially when combined with other low down-payment measures currently being offered by Fannie Mae and Freddie Mac. They also took issue with the current state of the FHA itself, which is below its required minimum, and the reputation of the loans; Senators Bob Corker of Tennessee and David Vitter of Louisiana, for example, have argued the change could cause government-issued loans to become under-priced.

These claims have been dismissed by a number of experts and lawmakers, including Castro, who pointed out that the lower premiums would only prevent the FHA from reaching the minimum by a few more months. Proponents also say that the reduction is designed to stabilize the federal lending market. In recent months, many homeowners have chosen to refinance their homes under the lower premiums offered by Fannie and Freddie, making the FHA less able to compete with these organizations. But with nearly 373,000 single-family loans and 100,000 refinancings conducted through the FHA in 2014, the reputation of the administration still seems to be no issue.

Obama also took care to assure skeptics that the FHA’s new loans would be meted out carefully. While many current borrowers have credit scores that would be considered high risk by traditional lenders, he stated that the organization would not be providing loans to those who could not afford them, as had been done in years past. Encouraging borrowers to avoid purchasing things they could not afford, he said that the lower premiums would enable responsible homeowners to give the housing market a needed boost.

But who should take advantage of the new premiums? It depends on the situation. Experts are predicting that the biggest benefits will likely be seen by those looking to refinance, especially borrowers who were unable to complete the process in 2012 or 2013 or who currently have higher premiums. Likewise, aspiring homeowners able to afford the FHA’s down payments and new premiums, lower though they may be, should consider this option. However, some are still cautious: the reduction has put pressure on the FHA’s rates, causing prices to tighten. Will this hamper the reduction’s success or present no obstacle to home sales and refinancing? Only time will tell.

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