In the final days of his administration, President Obama introduced a cut that lowered the FHA loan mortgage insurance rate from 0.85 to 0.60 percent. That cut would have saved the average borrower about $500 in 2017. The Obama cut, which would have gone into effect on January 27, will not because President Trump reversed the decision on the first day of his administration. If you’ve missed any of this, that’s likely because the news did fly under the radar in both cases. In the case of Obama, news coverage focused on sanctions against Russia for hacking, and in the case of Trump, news coverage focused on an executive order that could affect the Affordable Care Act greatly in many states. Still, the FHA non-cut is a big story that could have major implications for the real estate market.
Rates Aren’t Going Up Right Now
Perhaps the most important aspect of this news is that the FHA loan mortgage insurance rate isn’t going up or at least not yet. Until the final days of the Obama presidency, the industry was expecting 0.85 percent, and the rate is still going to be 0.85 percent. Keep in mind that the rate had been increased several times during the Obama administration in order to bolster Federal Housing Administration finances in the wake of the housing crash, and the rate had been as high as 1.35 percent in 2014. Perhaps these changes are nothing more than political maneuvering, as some will certainly and understandably see it. After all, President Obama could have introduced the cut much earlier, and President Trump did lump it in with other last-minute changes for which he was critical of Obama.
If You Were Eligible, You Probably Still Are
Any low-income home buyers and other consumers who were eligible for an FHA loan prior to or after the Obama cut in 2016 most likely still are. Not much at all has really changed on this front. Costs for borrowers are exactly the same as they have been since January 2015, and requirements have largely remained the same as well. This isn’t to brush away what $500 savings could have meant to those operating on tight budgets, but in the grand scheme of things, not much is truly different despite the blowback the new administration has received over this decision.
The Housing Markets Continues to Get Healthier
Be mindful that Federal Housing Administration reserve levels have stabilized. Some will still characterize the housing market as sluggish, which isn’t untrue, but it isn’t a complete picture either. One thing Democrats and Republicans can agree on is the importance of the FHA and the precarious place it was in after the crash. The market may still be sluggish, but is much healthier and continuing to get even healthier. The Obama cut could have been perceived as a positive signal for the market, but a conservative approach for the Federal Housing Administration may be just what we need long-term. The prevalence of non-traditional lenders raises many concerns for mortgage financing moving forward.
A Cut May Still Happen
The Trump administration has stated that the FHA loan mortgage insurance rate cut was suspended indefinitely, which certainly sounds final. However, keep in mind that Ben Carson, the HUD Secretary appointed by Trump, has spoken at length about working with the Federal Housing Administration and other financial experts to examine these policies and adjust them as needed. Although perhaps unlikely, there’s still time for a 2017 cut, and unless something drastic occurs, a 2018 cut is all but guaranteed. Politicians may disagree on the best way to protect the Federal Housing Administration and low-income home buyers and other taxpayers, but it is in the best interest of everyone that these homes be affordable and that people continue to purchase homes and maintain their mortgages.
The System Will Undergo a Reassessment
After the housing market crash, foreclosures soared, and the reserves that the Federal Housing Administration had were quickly depleted. This was a government agency that was operating based on a market reality that simply wasn’t true any longer. This is why Obama increased the insurance fees, but increasing insurance fees alone wasn’t and still isn’t enough. Other changes had been made too, and since reserve levels have stabilized, Obama and others felt that the agency could withstand the cost of reducing taxpayer obligations. Nevertheless, the system is due to a reassessment, and that review is all but guaranteed with a new administration. The industry should expect changes moving forward.
The Effect on Income Properties
Many people believe that FHA-approved loans are only for low-income and first-time home buyers, but you’re probably aware that this isn’t the case. You can have an FHA-approved loan on your sixth property, and individuals and even property management companies in Albany and elsewhere can take out the FHA-approved loan for real estate purchases made as investments. The only limitation is that you only have one FHA-approved loan at a time. Therefore, for those involved in property management on a professional level, there likely won’t be much effect at all. The difference between 0.60 and 0.85 percent would’ve been nice but likely not that significant for well-managed property investments.
Conclusion
FHA-approved loans are a powerful tool for the average home buyer but also those who invest in and manage income properties. The Federal Housing Administration is also an excellent barometer for the housing market in the United States. The Trump decision to overturn the Obama cut probably won’t have a significant effect on its own. However, it does likely indicate that changes are on the way, and everyone in this industry should pay attention to how this administration approaches this situation moving forward.
