If a planned 25-basis-point annual premium cut goes into effect on January 27, the Federal Housing Administration could see a major increase in loans.
The premium reduction was announced on January 9 by Department of Housing and Urban Development Secretary Julian Castro. The premium reduction would reduce the annual premiums most borrowers will pay by a quarter of a percent.
The FHA could see a $50 billion increase in single-family loan endorsements this year if the premium cut goes into effect. The borrowers could also potentially see an average of $500 saved this year.
“With recent hikes in mortgage interest rates, the expected average savings of $500 this year will help offset the higher cost of homeownership for many prospective homebuyers and put them on the part to achieving the American Dream,” said Geoff McIntosh, President of the California Association of Realtors.
However, most of it will come at the expense of Fannie Mae and Freddie Mac, which is sparking anger amongst private mortgage insurers.
“The economics for marginal conventional borrowers paying private MI should shift back in favor of FHA execution,” said Satish Mansukhani, an MBS strategist at Bank of America/Merrill Lynch.
Mansukhani expects that FHA lenders will see a 12 percent increase in purchase loans and a 9 percent increase in refinances.
On the purchase side, “it moves the pendulum a little more in favor of the FHA. I think you will see FHA market share pick up,” said Scott Buchta, head of fixed-income strategy at Brean Capital.
Lindsey Johnson, president and executive director of the U.S. Mortgage Insurers, warned of the mortgage risk that taxpayers are currently exposed to. Taxpayers are exposed to $1.3 trillion in mortgage risk outstanding at FHA.
“Arbitrary reductions to the FHA’s MIP is bad policy because it pulls borrowers who would otherwise be served by the conventional Fannie Mae and Freddie Mac market, which is backed by private mortgage insurance for first losses versus the taxpayer,” Johnson said in a statement.
Buchta expects a pickup in FHA refinancing, but not as big as the wave in early 2015.
“The majority of FHA borrowers are out of the money,” Buchta said. He said this could change if rates go back up, though. “If we get the FHA rate back down towards 3.5%, then this MIP reduction will have a much bigger impact,” he said.
The incoming Trump administration could potentially delay or completely revoke the premium reduction.
According to HUD, the FHA is the “largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.”