A leg up for the low-income homebuyers hangs in the balance. Since his ascension in office, Trump’s first action in power early 2017 was to put the Housing and Urban Development’s proposed FHA’s annual insurance cuts on hold, which were introduced under President Obama’s terms.

The president commissioned Brian Montgomery as the commissioner of FHA, which he was, under President George W. Bush and one of the top agendas in his to-do list since his return to the office was deciding whether FHA premiums will be cut. Before President Obama’s exit from the office, the HUD had proposed annual FHA insurance premium cuts, lowering the insurance rates by 25 basis points.

The FHA this year again broke a few hearts when it announced that there would not be any cuts to the mortgage insurance premiums. In the fiscal year 2017, the flagship program performed weaker than expected. This year, the FHA’s flagship mutual mortgage insurance fund is in the best condition since before the financial crisis, with capital levels at the highest level since 2007.

The Housing Reforms Proposals

Speaking during the annual report to the congress, the FHA commissioner Brian Montgomery said that premium cuts were something that the department was thinking about. He also noted that changes to the premiums were something envisaged in the housing reforms proposals.

Early this year, the White House gave a directive to the Departments of Treasury and Housing and Urban Development (HUD) to develop plans for the administrative and legislative reforms to the housing finance market with a view to ending the federal conservatorship of the GSEs (Fannie Mae and Freddie Mac).

The reform plans outline touch many aspects delineated in the presidential memo, including GSE capital requirements, affordable housing, the role of the FHA, and promoting private competition. They also consist of a series of recommended legislative and administrative reforms that are designated to protect the taxpayers against future bailouts, preserve the 30-year fixed-rate mortgage, and help hardworking Americans fulfill their goal of becoming homebuyers.

“The Trump Administration is committed to promoting much-needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” said U.S. Treasury Secretary Steven T. Mnuchin. “An effective and efficient Federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration.”

The HUD reform plan contains a mix of legislative and administrative reform proposals which are mostly aimed at internally refocusing FHA. This has two major connotations, first the reduction of the risk to the FHA portfolio and this is where the premiums cuts come in and secondly improving FHA’s technology. The vast majority of the proposed legislative reforms in the HUD plan target FHA, and to a much lesser extent, Ginnie Mae. The legislative plan is somehow limited to address highly specific matters of some technical complexity. This includes establishing statutory limitations on FHA cash-out refinances and addressing the suspension periods and civil money penalties that the FHA uses when establishing penalties.

The MIP Might have improved… but “…we’re there yet”

The annual report to congress showed a capital ratio rise of 4.84%, from 2.76% last year. However, the fund’s improved status doesn’t mean that the fund is ready to cut the ‘life of loan’ policy, instituted in 2013.

Typically, a mortgage borrower making a down payment of less than 20 percent of the purchase price of the home will be required to pay mortgage insurance. Mortgage insurance lowers the risk to the lender, which means that you can qualify for a loan that you might otherwise not get, but to reciprocate, the cost of the loan will increase. Note that mortgage insurance doesn’t in any way protect the loan borrower, rather, the lender. In the event you fall behind on your payment, your credit score will adversely be affected and you could lose your home through foreclosure.

Two things to note; first, the improved condition of the Mutual Mortgage Insurance Fund doesn’t mean the FHA is ready to cut the life of the loan policy and secondly, it doesn’t mean that the premiums are going down.

“When do we think we’re at a sufficient level to make any adjustments to premiums? I don’t think we’re there yet, but it’s something we’re looking at overall.”

Also, worth noting, the congress requires that the fund maintains at least a 2% ratio in reserves, this is the fifth year that it has. In the fiscal year 2019, the FHA’s market share for the home-purchase mortgages dropped to 11.4% from 12.3% in 2018.

This year, FHA endorsed 990,429 home mortgages through the forward mortgage program, including 743,280 purchase loans. For the 2 years, about 83 percent of the borrowers were first time home buyers.

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