Guest post by Tom Adams: Obama homeownership push or mortgage market share battle?
This is a guest post by Tom Adams, who spent over 20 years in the securitization business and now works as an attorney and consultant and expert witness on MBS, CDO and securitization related issues.
Good news for would-be home buyers – the Obama Administration heard your concerns and has a new tool to help make homes more affordable!
Are they going to increase wages? Or reduce the price of homes? No, they’re going to attack mortgage rates for Federal Housing Administration (FHA) borrowers. Of course, mortgage rates are already at close to all time lows, having declined significantly over the past year to about 3.7% on conventional 30 year fixed rate loans. The Administration’s main tool for doing this is to cut the insurance fee charged by the Federal Housing Authority on new mortgages by 0.50%, from 1.35% to 0.85% (on top of the interest rate charged to borrowers).
This fee is paid by borrowers into a fund that the FHA uses to protect itself against losses in case borrowers that it has insured later default. In theory, this move was somewhat controversial because the FHA’s fund had incurred higher than expected losses during the crisis and the FHA had to ask Congress for money to shore up the fund not that long ago. Around the same time, the FHA raised this insurance premium to additionally replenish the fund.
If it’s already really cheap to borrow money, is another 0.5% reduction going to make that big a difference? Probably not, because historically low interest rates haven’t been the obstacle to buying a house. I expect the number of net, new home buyers produced as a result of this change will be considerably lower than the Administration is projection (“millions of homeowners,” according to Obama’s statement today).
Rather, would-be homeowners don’t have the income to support buying the houses listed for sale in their markets – which is another way of saying that, for average Americans homes are too expensive for them to afford (or wages are too uncertain for them to want to buy).
Also note that the new lower fee is primarily aimed at new home purchasers. In order for existing FHA borrowers to get the new lower premium they would have to refinance into a new loan, which means they’d have to incur new closing costs. The new closing costs would probably eat up most of the savings for a year or more. Presumably, this would discourage many existing borrowers from refinancing for the lower premium, which helps the FHA by allowing it to retain the old, higher premium on the borrowers who don’t refinance.
This highlights one of those fundamental conundrums in the housing market. Existing homeowners and home sellers want home prices to go up. Representatives of this group are great at lobbying and have convinced many people (including, by all appearances, this Administration) that rising home prices are a good thing for America. On the other hand, potential home buyers would rather not have home prices going up – because that makes buying much harder. For whatever reason, this group has about zero lobbying juice.
Making credit cheaper is a small tool the Administration has via this reduced premium, so they used it, I guess. But it’s an action that has consequences, including potentially running the risk of not having enough in the fund down the road if losses increase (not a risk I’m especially worried about – the Urban Institute did a fine analysis of why the lower fee is probably sufficient – but it’s a reasonable concern). In addition, it is somewhat disheartening that the Administration still seems to believe that the solution to consumer issues is to have the consumers take on more debt.
The most significant impact of this change is that it will make FHA loans more competitive with Fannie Mae and Freddie Mac loans. You may recall that Mel Watt, the man in charge of the Federal Housing Finance Agency (FHFA), which manages Fannie and Freddie, made a big announcement recently that the GSE’s would offer 97% loan-to-value (LTV) ratio loans to qualified borrowers. Previously, that type of LTV had been mostly the territory of the FHA.
So, effectively, this is just a form of catch-up for the FHA. The various government housing agencies are competing for market share among the same limited universe of qualifying borrowers by trying to get them to take on bigger mortgages than they would qualify for previously. For the average would-be buyer of the average house, the new, lower FHA fee would be worth about $900 a year, equivalent to about a $75 reduction in monthly payment.
It’s hard to believe that anyone in the Administration believes that this will do much for making homes more affordable for Americans. Perhaps it is a measure, however, of how seriously the Administration is taking the issue of housing affordability. There are big issues in housing and the economy that need to be taken seriously – like resolution of Fannie and Freddie, home prices that still remain beyond the reach of many Americans, stagnant wages, on-going foreclosure and mortgage servicing problems – but the Administration seems content to tinker around the edges and try to sell it as important reform.