Jan 21

One Hour After Taking Office, Trump Suspends FHA Mortgage Fee Cut:

In a move that has sparked controversy among some economists, within an hour of being sworn in, Trump undid one of Barack Obama’s last-minute actions, a mortgage-fee cut under a government program catering to first-time home buyers and low-income borrowers. The cut, which would become effective on January 27, would have reduced the annual premium for someone borrowing $200,000 by $500 in the first year, however exposing taxpayers to further losses in case of a spike in defaults.

Last week, as part of a scramble of 11th hour actions by the outgoing president, Obama’s Housing and Urban Development secretary, Julian Castro, said the FHA would cut its fees. In addition to the morgage-fee cut, in the last days of Obama’s administration, the White House announced new Russia sanctions, a ban on drilling in parts of the Arctic and many other regulations. The administration didn’t consult Trump’s team before any of these announcements.

While nominal, Republicans have argued that fee reductions put taxpayers at risk by lowering the funds the FHA has to deal with mortgage defaults even though the net impact of such a fee cut is negligible in the grand scheme of things, once the next housing downturn arrives and the FHA is in need of another bailout.

As a result, in addition to his first executive order on Friday night to “ease the burden of Obamacare‘, the new administration on Friday said it’s canceling this last minute reduction in the Federal Housing Administration’s annual fee for most borrowers, which had not been implemented yet.  A letter Friday from HUD to lenders and others in the real-estate industry said, “more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions in an ever-changing global economy that could impact our efforts.”

The reversal was to be expected: at his confirmation hearing last week, Ben Carson, Trump’s nominee to lead HUD, FHA’s parent agency, said was disappointed the cut was announced in Obama’s final days in office. On January 9, House Financial Services Committee Chairman Jeb Hensarling stated Obama ‘Parting Gift’ Puts Taxpayers at Risk of Another FHA Bailout.

On the other hand, democrats were quick to use the reversal for political purposes. Chuck Schumer took to the chamber’s floor to denounce the reversal.  “It took only an hour after his positive words on the inaugural platform for his actions to ring hollow,” Schumer said. “One hour after talking about helping working people and ending the cabal in Washington that hurts people, he signs a regulation that makes it more expensive for new homeowners to buy mortgages.”

Others, such as Mark Calabria, director of financial regulation studies for the libertarian Cato Institute, disagreed: he said it was appropriate for the administration to examine last-minute decisions by its predecessor, “especially when those decisions appear to be purely motivated by politics.”

Some more background on the now defunct proposal:

The FHA sells insurance to protect against defaults and doesn’t issue mortgages. It is a popular program among first-time home buyers because it allows borrowers to make a down payment of as low as 3.5 percent with a credit score of 580, on a scale of 300 to 850.

The Obama administration announced last week it would cut the insurance premium by a quarter of a percentage point to 0.60 percent, effective on Jan. 27.

Some housing industry groups lauded the change, saying it could increase home buying by offsetting recent rises in mortgage rates. Supporters of the reduction were disappointed that the Trump administration reversed course.

Trump’s reversal of the late quasi-subsidy by Obama was quickly spun as meant to hurt smaler homebuyers.

“This action is completely out of alignment with President Trump’s words about having the government work for the people,” said John Taylor, president of the National Community Reinvestment Coalition, through a spokesman. “Exactly how does raising the cost of buying a home help average people?”

Sarah Edelman, director of housing policy for the left-leaning Center for American Progress, in an e-mail wrote, “On Day 1, the president has turned his back on middle-class families — this decision effectively takes $500 out of the pocketbooks of families that were planning to buy a home in 2017. This is not the way to build a strong economy.”

Not really: the decision has zero impact on any homebuyers as the fee cut had not even been implemented before its was overturned, although we would be very concerned about the state of the US housing market if $500/year is all it takes to swing one’s decision in favor of buying a house, and as such would be even more concerned about the pain awaiting the FHA, which was already bailed out once after the last financial crisis.

As a reminder, following the housing crash, the FHA came under severe stress and in 2013 it received $1.7 billion from the U.S. Treasury, its first bailout in 79 years, due to a wave of defaults. To replenish the FHA’s coffers, the Obama administration several times increased the fees the agency charges. The law requires the FHA’s capital reserve ratio to stay above 2 percent, and the agency hit that level in 2015 for the first time since the bailout.

To be sure, during the next crisis the net impact of the $500 fee on the FHA’s capitalization levels would likely be nil, as the FHA would require far greater funding; however the Trump decision does point to a potential conflict of interest between public and private interests. Immediate beneficiaries from Trump’s decision were private mortgage insurers: shares of MGIC Investment and Radian Group erased earlier losses on Friday, trading up about one percent as of mid-afternoon. They closed little changed from the day before. Private insurers, which back loans guaranteed by mortgage-finance companies Fannie Mae and Freddie Mac, compete with the FHA for market share and have been critics of fee cuts in the past.

“It is important to ensure that the FHA fund remains strong to support homeownership in the future while minimizing taxpayer risk,” Teresa Bryce Bazemore, president of Radian Group, said in a statement. It was not immediately clear if Radian has any corporate relations to members of the Trump administration.

Some observers, such as Mish Shedlock have called for altogether shutting down the FHA due to various absurdities in the risky system:

  • FHA loans are known as being one the easiest programs to qualify for. Applicants only need a credit score of 580, and downpayments can be as low as 3.5%.
  • FHA loans have some of the lowest mortgage rates available. Rates on FHA loans are consistently lower than similar conventional loans. This makes FHA one of the best loan programs available.
  • FHA loans are also the most likely of any major loan to get approved.

As Shedlock adds, “given the FHA approves loans at lower credit scores and lower down payments than the private market, FHA loans ought to reflect that risk and have a higher interest rates than the private market. Taxpayers bear this risk.” In other words, another government subsidy. We agree with his conclusion: ‘Government ought not be involved in housing at all. The FHA is best shut down.

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