The Donald Trump administration has taken its first controversial move to suspend the mortgage insurance rate cuts for all the FHA backed loans. This move was made just after an hour of Donald Trump assuming his presidency. This is declared by the Housing and Urban Development (HUD) department. This policy was originally announced by Obama during his last days as a president. The mortgage insurance rate cuts were introduced to benefit borrowers who can save hundreds of dollar per year owing to the lower insurance premiums.
When the policy was first introduced, the Republicans were worried that it would add burden to the existing taxpayers. When the loans remain unpaid, the Federal Housing Administration has to jump in to cover the incurred losses. In 2013, the agency urged the US Treasury to offer $1.7 billion bailout successfully. This happened right after the subprime mortgage market collapsed.
The FHA backed loans are different from the typical mortgage loans. The FHA actually doesn’t distribute loans. It insures the mortgages and takes responsibility to reimburse the lenders should the borrower default. This new policy is a great help for borrowers as they had to pay a small down payment even with a low credit score. The FHA backed loans allowed the borrowers to put down 3.5% as down payment and they could qualify with a credit score of even 580. This means that those on the verge of bankruptcy or debts in collection stage can afford to become a home owner. However, the average credit score for FHA borrowers in the 3rd quarter of 2016 was 679.
In recent years, the popularity of FHA-backed loans continued to increase. Many lenders were interested in offering home mortgage loans as they are secured by FHA. More than banks, private lenders popularized the FHA market. Non-bank lenders don’t have strict requirements on awarding a loan and this created a nervousness in the industry.
The nominee for HUD, Ben Carson spoke at his confirmation hearing last week that the private mortgage insurance industry should have a bigger role in supporting borrowers who can’t afford a 20% down payment. He said that the entity providing insurance is not a concern, but the administration should have a backstop. He admitted that the FHA rate cut surprised him and he would reexamine the policy if he is appointed as the head of HUD. The suspension of the rate cut will be in effect from January 27th even before Ben Carson could appear for the confirmation vote.
The rate cuts suspension mean that the borrowers have to deal with a rate of 0.85% instead of 0.60%. HUD argued that FHA is committed to continuing to provide mortgage insurance for a long term, making it viable for the taxpayers. The Obama administration argued in favor of the rate cuts stating that the finances of FHA have improved greatly after the bailout in 2013. The suspension of FHA rate cuts is a disappointment for new home buyers who have to deal with the increased mortgage interest rates after the November election.