The Obama administration announced Wednesday that it is planning to reduce the cost of government mortgage insurance premiums, pursuant to assisting low-income consumers in their dreams of home ownership. This was followed up the day after, as President Barack Obama confirmed that these premiums will indeed be reduced.
The initial announcement was made by Housing and Urban Development Secretary Julian Castro, who said tht the Federal Housing Administration will discount the cost of insurance by over one third, reducing the previous value of 1.35 percent of the loan’s value to only 0.85 percent. Statistics from Bloomberg show that the FHA took up a 30 percent share of the entire mortgage insurance market as of the September ending quarter of 2014.
Mortgage insurance, as per the bylaws of the FHA, is a requirement for those who take out FHA home loans as a means of protecting them should they default on their monthly payments.
From 2015 through 2018, the FHA expects the cut in mortgage premium fees would benefit about two million borrowers, allowing them to save an average of $900 per year should they buy a new home or refinance their existing property. It is also forecasted that the reduced costs would entice some 250,000 first-time home buyers; most statistical reports heretofore released show a trepidation on younger home buyers’ parts to enter the housing market, due to a combination of high mortgage rates and high prices.
The new government move is symbolic of its ongoing plans to help low-income American consumers enter the housing market after months, or sometimes years of “sitting the fence.” Prior to the FHA’s announcement, government-backed mortgage buyers Fannie Mae and Freddie Mac announced that first-time home buyers could potentially qualify for a mortgage where the down payment is only 3 percent of the total value. But while both government announcements should augur well for the financially-challenged in America, Mortgage Bankers Association CEO David Stevens believes that these may not be enough to substantially stoke the fires when it comes to home buying statistics.
“I think the marginal impact on sales will be small because potential buyers make the decision to purchase based on trigger events, such as a new job, marriage, kids, etc,” postulated Stevens, who believes improving affordability can only do so much, only changing “how much home (consumers) can buy.”
Another interesting aspect of this week’s recent announcement is how house Democrats and Republicans remain divided in terms of how they plan to tackle mortgage reforms such as the ones mentioned above. Democrats have been all for these new policies as they primarily benefit struggling consumers with low incomes. Republicans, on the other hand, believe that reduced costs of insurance premiums could pose a negative effect to the Obama administration in the grander scheme of things, should they only result in consumers defaulting in significant numbers.
Some time back, the FHA had required a multibillion dollar injection of taxpayer funds, and while the agency is once again solvent, its capital requirements will no longer be legally valid by next year.