The Department of Housing and Urban Development recently announced that the Federal Housing Administration will reduce the annual premiums that new borrowers pay by 50 basis points. The primary goal of this change is to help make homeownership more affordable for middle- and lower-middle income families. Rolling back the insurance premium, which was raised at the start of the Great Recession, is expected to benefit hundreds of thousands of borrowers who have been priced out of the market.
This move, combined with Fannie Mae and Freddie Mac's decision to lower their down payment requirements, should help broaden access to homeownership. But these decisions also send an important message about the government's role in the housing market. The government is not reducing its dominant place in the mortgage market: it is expanding it.
The government has upwards of a 90% share in the mortgage market, according to the Mortgage Bankers Association. With such a high percentage of the market controlled by the government, it may be better described as a utility — and the extent of such domination as a monopoly.
Both market professionals and government officials, including former FHA acting director Edward DeMarco, claim to agree that the government's market share needs to shrink and that private capital should return to the housing market. The regulatory environment and investors' lack of demand for non-agency products are already holding private capital back. The government's decision to lower premiums and down payments will do nothing to make room for private capital.
It's hypocritical to say one thing and do another. The actions of the FHA and the government-sponsored entities suggest that the government feels the housing market is too important to be left in the hands of the private sector. But with the U.S. homeownership rate at its lowest level in almost 20 years, it may be time to rethink that approach.