An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with a FHA loan pay for mortgage insurance and this protects the lender from loss if the borrower defaults on the loan.
Generally, FHA loans have lower interest rates versus conventional financing. They also allow borrows to finance up to 96.5% of the home’s value in the form of a mortgage and permit credit approvals with FICO scores as low as 580.
These loans, first created back in 1934, are designed to assist buyers of lower and moderate income/credit to be able to buy a home. Generally speaking this is a loan for the lower middle class in America. After the 2007 market crash, the insurance premium on these loans jumped considerably. The increased premium was to stabilize the financial soundness of the FHA and their lending product and alleviate the concern by the FED from having to bailout borrows in what was a major nationwide foreclosure epidemic.
Currently, the FHA reports that the debt held by the FHA is healthy and it is time to reduce the insurance rates (PMI) to prerecession standards. The Obama administration put this insurance expense reduction in motion with some dual party support. But on Friday, January 20th, that effort was halted through an executive order. The Trump administration canceled the 25 basis point cost reduction at the behest of Republican-controlled Congress. Independent of Congress, Trump’s position (although not openly discussed) is to keep significant protections in place to reduce the risk of any financial bailout (I believe his casino experiences have reduced his willingness to take any risk of a governmental bailout). The higher the insurance premium, the greater the insurance protection. It will prevent many other buyers from obtaining an FHA loan — which by itself, is another form of protection.
The National Association of Realtors forecasts that this executive order will affect over 40,000 potential buyers and dampen demand reducing real estate values.
I completely understand the need for sound, secure credit protection policies to thwart any sort of government bailout from happening. But I also see the need for creating business and in keeping demand for property as high as possible (it is usually the largest asset in a family’s portfolio). I believe there are other solutions to provide protection while minimizing financing costs for our middle-class.
Possible Solution: The FHA product is not a government loan, but instead it’s a loan from a lending institution and an insurance overlay by the FED. The lending institution’s margin on this product is up to 4X the profit margin of a conforming loan from the same lending institution. There might be an option to have the lending institution foot the cost of the insurance or participate in the syndication of risk with the FED. In doing so, it will require the lender to work harder to underwrite these loans and only close them with qualified buyers. The FHA product is not meant for high risk buyers who are on the precipice of a foreclose, but instead it’s meant for the marginal buyer that can’t secure a conventional mortgage.