The Trump administration caught the attention of the real-estate industry when it abruptly suspended a planned cut in FHA mortgage-insurance premiums — a move that could signal a new conservative bent to the nation’s housing policy.
An hour after Donald Trump took the oath of office last month, his administration caught the attention of the real-estate industry when it abruptly suspended a planned cut in Federal Housing Administration mortgage-insurance premiums.
The move, which overturned a decision the Obama administration had made on its way out the door, could signal a new conservative bent to the nation’s housing policy.
Trump’s nominee for Department of Housing and Urban Development secretary, Ben Carson, during his confirmation hearing a week before the inauguration, signaled in an exchange with a Republican senator that he might be open to some housing-policy changes.
“Taxpayers are on the hook for $1.2 trillion worth of mortgages,” said Sen. Pat Toomey, R-Pa., referring to the total volume of FHA-backed home loans. “All the while there is a private industry in the business of insuring mortgages.”
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Carson, in response, said it didn’t matter what particular entity provides insurance, but there has to be some sort of “backstop.”
The FHA, created during the Great Depression when home building had almost ground to a halt, is such a backstop. To encourage more lending, the agency provides insurance to approved private lenders in the case of default.
In general, borrowers who are able to make a down payment amounting to 20 percent of a home loan don’t need mortgage insurance, and for those who can’t pony up that amount of cash but have good credit, cheaper insurance from private companies is often available.
But the FHA, with its mission to boost homeownership, is often a preferred option for cash-poor, first-time homebuyers and those with spotty credit — or a combination of both. Down payments can be as little as 3.5 percent of the purchase price, and the program is open to borrowers with credit scores as low as 500.
Despite the generous underwriting standards, the mortgage-insurance premiums covered defaults and fully funded the FHA for decades — until it received its first taxpayer bailout in 2013 because of fallout from the housing bust. Since then, the agency’s finances have improved significantly, though that hasn’t assuaged concerns of some Republicans.
Shortly after the election, Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, pointed to a bill his committee passed in 2013 as the “right vehicle for reform” of the nation’s housing-finance system.
That bill, known as the Path Act, would have raised the minimum down payment for FHA mortgages to 5 percent for borrowers who are not first-time homebuyers.
Beyond that category, it would have limited program access to low- to moderate-income Americans and applications within a disaster area or during a “counter-cyclical market,” as defined by the government. The bill also would have tightened requirements on borrowers who had previous foreclosures.
“The Path Act shifts risk away from the taxpayers and into the private sector by reducing FHA’s footprint and making sure the agency is complementing the private sector, not competing with it,” Hensarling said shortly after the bill passed the House Financial Services Committee in 2013.
The bill didn’t move forward during the 2013-14 congressional session — a time when Republicans controlled only the House — but could have a brighter future today.
The FHA — even without the Obama rate cut — tends to be cheaper than private mortgage insurance for borrowers with poor to fair credit who can’t make down payments of even 5 percent, said Richard T. Cirelli, a Laguna Beach, Calif., mortgage broker.
What’s more, some repeat and wealthier buyers with credit problems have a hard time qualifying for non-FHA loans, said Jeff Lazerson, another Southern California mortgage broker. If the Path Act became law, he said, “It would knock out a lot of people — period.”
But any significant change that would make FHA-backed mortgages less attractive or available would probably cause blowback from the real-estate industry, including the 1.2 million-member National Association of Realtors.
The group strongly opposed the Path Act in 2013, saying the proposed changes to FHA, as well as Fannie Mae and Freddie Mac, which support the conforming loan market, would “jeopardize the ability of American families to purchase a home, as well as the future of the housing industry itself.”
The Realtors also called on the Trump administration to reverse its decision on the recent rate cut.
Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA, said he expects the administration will have a conservative tilt in housing policy, but he noted that it’s uncertain how the debate over housing policy will play out.
“Ben Carson is a complete unknown in the housing world,” he said.