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FHA Rate Cut: What It Would Have Meant To Lenders

collaboration-bhExperts remain divided on the merit of the postponed cut to the FHA’s mortgage insurance premiums, with some believing the cut would have eased burdens on low-income homeowners, while others saying it would have put American taxpayers at risk of paying for yet another bank bailout.

FHA officials announced indefinite suspension of the planned cut on Friday via mortgagee letter, shortly after the inauguration of President Donald Trump.

FHA sells mortgage insurance to banks to protect against defaults. It allows first-time borrowers to make a down payment as low as 3.8 percent with a credit score of 580.

The planned cut would have lowered the monthly premium cost by $41.70 for a $200,000 loan, according to Bankrate.com. The cut would have saved approximately $500 a year for the average borrower.

Daryl Jones, Director of the national firm Cornerstone Advisors, said the effect of the rate cut suspension will be more keenly felt by borrowers than lenders.

“If the discounts had already been in effect for some time and were being repealed then I think we would have a much bigger issue,” Jones said. “However, since most borrowers are likely not aware of it anyway, the tangible impact to the lenders themselves should be limited.”

Sarah Edelman, Director of Housing Policy at the Center for American Progress, said reversing the FHA’s cut to mortgage insurance premiums makes buying a home more difficult for the average American.

“With mortgage interest rates already on the rise, reversing the FHA’s move to cut insurance premiums in fact puts the dream of homeownership farther out of reach for millions of hardworking Americans,” Edelman said. “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.”

William E. Brown, President of the National Association of Realtors, also released a statement expressing his dismay.

“According to our estimates, roughly 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new homebuyers will be left on the sidelines in 2017 without the cut,” Brown said. “We’re disappointed in the decision but will continue making the case to reinstate the cut in the months ahead.”

The FHA is required to maintain a capital reserve ratio of at least 2 percent. At the end of the last fiscal year, that ratio was 2.32 percent. It took a beating after the 2008 financial crisis, requiring a $1.7 billion bailout from the U.S. Treasury in 2013 following a wave of defaults, according to Bloomberg. Fee increases in the years since helped replenish the FHA’s financial reserves.

About Author: Phil Banker

Phil Banker began his career in journalism after graduating from the University of North Texas. He has covered a number of communities across Texas and southern Oklahoma, writing news and sports for publications including the Ardmoreite, Ennis Daily News and the Plano Star-Courier. He is currently a staff writer for the MReport.
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