What the FHA mortgage-premium cut actually meant

President Trump had been in office just a few hours when his administration first made waves in the housing market.

"On his first day as president, Donald Trump charged millions of new homeowners an extra $500 a year," the news site Quartz declared. "FHA mortgage premium cuts helping low-income homebuyers canceled by President Trump," said CBS News. Time magazine was even more pointed: "How Donald Trump Just Raised Many Mortgage Bills."

In some ways, the headlines were not wrong: Trump had reversed a last-minute decision by his predecessor to slash a fee that lower-income borrowers pay for Federal Housing Administration insurance on their mortgages.

If implemented, former President Barack Obama's premium cut could have saved a homeowner borrowing $200,000 about $500 in the first year, the FHA estimated. And because the agency insures loans to first-time and low-income borrowers, savings like that, Democrats were swift to argue, could have made a big difference for buyers.

Yet lost in the initial noise of Trump's action, it seemed, was one important thing: Reversing Obama's decision did not mean costs were going up. The cut had not yet taken effect, meaning the FHA insurance rate - currently 0.85 percent of the loan amount - will stay exactly where it has been since January 2015.

What that means: If you were eligible for an FHA-insured mortgage before, there's a strong chance you are eligible again.

So why the swift blowback to the new administration's move?

For some, it seemed, it was the speed that raised questions: Was Trump's action just a politically motivated jab at Obama, who ushered in policies days before leaving office? Or could it indicate broader changes coming to the housing market?

To be sure, Trump's reversal of the premium cut is nothing to ignore. A $500 savings for borrowers certainly makes a difference in tight budgets.

And valid concerns exist among observers about whether upending the ability to make home-buying easier was the right signal to send in an already sluggish market.

But the FHA's background is fraught with complication - making it difficult to view either administration's actions in simple black and white.

Formed in the 1930s, the FHA provides mortgage insurance and collects premiums from borrowers as a way to reimburse approved lenders - private banks and institutions - in case a borrower stops making payments. That way, lenders are more likely to give loans to people with credit scores as low as 580.

For decades, the FHA helped facilitate the purchase of millions of homes. But as the economy soured and the housing market collapsed, some borrowers who flocked to the FHA found themselves unable to make their payments, underwater as their properties lost value, or both.

By the first quarter of 2012, federal research shows, the share of delinquent government-guaranteed loans had soared 27 percent from the year prior. Foreclosures jumped 17 percent.

To cover those losses, the agency's capital reserves were rapidly depleted. In an attempt to bring them back, Obama increased FHA insurance fees - but it still was not enough.

By 2013, the agency's reserves had dropped so low that it was forced to take its first-ever cash infusion, $1.7 billion from the Treasury Department.

Today, reserve levels have stabilized, meeting congressional requirements - likely spurring Obama's cut.

But it's important for any administration to tread carefully: The new dominance of non-bank lenders, such as Quicken Loans, makes mortgage finance more precarious. Quicken has already found itself in a legal battle with the Department of Justice over alleged misrepresentation of borrowers' incomes and credit scores to FHA. Quicken has denied the claims.

Ensuring that low-income individuals are able to buy homes should be a priority of any administration. But it should be met with careful consideration of what could happen to the FHA if mass defaults nationwide ever happen again.

cmccabe@philly.com

610-313-8113 @mccabe_caitlin

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