Will Trump Reverse FHA's Premium Cut?
WASHINGTON — Within minutes of the Federal Housing Administration's announcement that it was cutting annual mortgage insurance premiums, observers were already wondering whether the incoming Trump administration would put a stop to the plan.
The FHA said it would cut the premium by 25 basis points, down to 60 basis points, starting on Jan. 27, a week after President-elect Donald Trump is scheduled to take office. That gives Trump and his team a limited window to delay or scrap the cut.
The first clue as to Trump's plans will likely come Thursday, when Housing and Urban Development Secretary-designate Ben Carson is scheduled for his confirmation hearing.
Observers said it will likely be a close call, but there are reasons why Trump may want to allow the premium cut to go through.
"The timing of this announcement allows the Trump administration to benefit from any positive market impacts while leaving the bulk of the political downside risk with President Obama," wrote Isaac Boltansky and Lukas Davaz, analysts with Compass Point, in a note to clients.
They pegged the odds that Trump would reverse the move at 40%.
Jaret Seiberg, an analyst with Cowen Washington Research Group, said stopping the premium cut could be a political liability for the new president.
"The Trump administration would be accused on day one of raising mortgage costs for average Americans if it reverses the FHA move," he wrote to clients. "In addition, Trump's career has been real estate. It would seem out of character for him to be aggressively negative on real estate in his first week in office."
Yet Trump is nothing if not unpredictable — and Republican lawmakers have been adamantly opposed to any further FHA premium cuts.
The FHA's mortgage insurance fund struggled during the housing crisis. As a result, HUD officials raised the annual fee to 135 basis points as losses mounted due to high delinquency rates and foreclosures.
After cutting the annual premium in early 2015, however, the FHA experienced a surge in mortgage applications that helped the fund recapitalize and exceed its statutory 2% minimum capital requirement again.
Republicans opposed the earlier premium cut, arguing it was too soon given the insurance fund's status, but they've continued to warn the FHA against making any moves even as the fund has recovered.
In a conference call with reporters, HUD Secretary Julian Castro said the fund was clearly healthy enough to support a premium cut.
"We made this decision on the strength of the mortgage insurance fund and what this will mean for hardworking Americans," he said. "We are confident it is the right decision on both these counts. I don't believe this is going to be scaled back."
Castro predicted that the premium reduction would create another surge in FHA home purchases and refinancing applications.
Carson was not consulted about HUD's decision until it was made public on Monday morning because Castro said the move was "market sensitive." But the issue is likely to dominate his confirmation hearing this week in front of the Senate Banking Committee.
Lending groups, meanwhile, welcomed the news.
"The prior FHA premium cut had a significant impact in creating new home purchase opportunities for borrowers — and we expect this new cut will do more of the same," said Scott Olson, executive director of the Community Home Lenders Association, in a statement Monday.
William Brown, the president of the National Association of Realtors, said the premium cut gives a "real opportunity to get back on track" in reaching young, first-time and lower-income borrowers.
Seiberg said the reduction will likely expand the pool of FHA borrowers who are less likely to seek financing from Fannie Mae and Freddie Mac lenders.
"In other words, we see this as an effort to expand the pool of eligible borrowers rather than to have FHA take market share away from Fannie and Freddie," he wrote. "That should limit the downside to the mortgage insurers from this action."
David Stevens, head of the Mortgage Bankers Association, said the reduction was "a result of our industry's and FHA's shared commitment to quality underwriting, and consumers will benefit as result."
In addition to the annual fee, FHA will continue to charge a 175-basis-point upfront fee, which was as high as 225 basis points during the housing crisis.
Some said the premium cut was inevitable given the strength of the fund.
"It is also important to remember that this [premium reduction] is not a gift from FHA," said Brian Chappelle, a mortgage consultant and founding partner at Potomac Partners. "It was done because the fund is in outstanding shape and projected to get even better. If FHA didn't do it they would be overcharging borrowers."