Jan 22 2017

Trump Executive Order #1: FHA Mortgage Insurance Premiums

Published by at 11:33 am under All General Discussions,The Trump Presidency


The first Trump Executive Order (EO) seems to be all about nothing. Even some of “Fake News” media has had a tough time blowing this one out of proportion. But of course some leftwing rags were in full angst mode (do they have any other?). But universally the “media” did not tell the whole story either.

Let’s begin with a Drama Queen from the left – Mother Jones:

Trump’s First Move as President: Screwing Over Homeowners

The administrative order will end Obama’s efforts to cut premiums on FHA-insured home loans.

resident Barack Obama issued an executive action requiring the Federal Housing Administration to decrease insurance premiums on FHA mortgages

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, a change that could have potentially saved low-income homeowners as much as $900 per year.

Emphasis mine at the end.

Let’s be clear, this change was directed towards a small minority of home purchasers: low-income, first time buyers. It sounds innocuous, but as we will discover this rate reduction is an echo of those risky policies that brought on the subprime mortgage disaster in the late 2000’s, which wiped out the wealth of ten’s of millions of Americans.

Why would anyone risk a repeat of that debacle? Is this all just for Political PR?

But for now, just admire the “potentially” (supposed) savings to homeowners – $900/year. That comes to $75/month. Keep that in mind.

USA Today actually had a more reasonable, if still one-sided, take on President Trump’s first EO.

In the first hour of Trump’s presidency, the U.S. Department of Housing and Urban Development sent a letter to lenders, real estate brokers and closing agents suspending the 0.25 percentage point premium rate cut for Federal Housing Administration-backed loans. The new rates, announced on Jan. 9, would have gone into effect on Friday.

The action will affect millions of homeowners with an FHA-backed mortgage. FHA backs about 16% of the country’s new mortgages [AJStrata: remember, this EO only effected a fraction of FHA loans].

That cut would have saved home buyers about $29 a month on a $200,000 mortgage. U.S. Sen. Chuck Schumer, a Democrat from New York, said the cut equaled an average of $500 per year.

Still “Fake News” due to implying that this applied to all FHA loans equally.

One bright spot here is the $29 a month savings for these few potential homeowners. That is a more realistic number (confirmed below). However, poor Sen Chuck Schumer is unable to do basic multiplication – or is deliberately exaggerating the numbers as did Mother Jones. For those who struggle with math like poor Chuck, his $500/yr number translates to $33.33. What is 4 dollars per month? Nothing on and individual basis.

But when you sum this plan over millions of potentially struggling home buyers – the very target of this Obama EO – then this could result in a shift of many millions of dollars. Here is a more balanced reporting from January 7, 2017. It explains a lot more about this topic:

The Obama Administration is directing, via executive action, the Federal Housing Administration to reduce annual mortgage insurance premiums by 50 basis points, from 1.35% to 0.85%.

The White House statement says that the typical first-time homebuyer, this reduction will translate into a $900 reduction in their annual mortgage payment.

Well, at least we know were the inflated numbers came from. Was this a simple change? Not according to Congress:

While the White House says that the new premium level is fully consistent with the FHA’s commitment to continue strengthening its financial health through growing reserves, the Republicans in Congress have reservations that the Congressionally-mandated reserves are well funded.

Further, the action is certain to receive pushback in the new Republican-controlled Congress, which has to approve the cut

“We do not have an estimate of how long it might take Congress to approve such a change, and we would estimate the probabilities at 50/50 of it occurring.

So it was going to die anyway – BFD. But the risk was partially exposed – the mandated FHA reserves required to avoid another subprime meltdown in the real estate market.

Was this really going to add new first time home buyers? No

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, most of this was PR:

Sterne Agee analyst Jay McCanless says that while many in the industry would welcome the cut, it won’t have as big an impact on housing as many expect.

“Such a change would be marginally beneficial for the average borrower, in our opinion, and consequently, we do not believe this news, if it proves true, is a catalyst for higher housing demand and higher earnings estimates,” McCanless says. “We Estimate the Riskiest Mortgage Borrowers Would Save about $25/month on their Mortgage Payment with Smaller Savings for More Creditworthy Borrowers.

“This savings will pull some marginal borrowers into homeownership, but it isn’t enough, in our view, to assume single family housing demand increases above our current assumption of 15.0% single family starts growth in 2015,” McCanless says.

Clearly this would not have the effect on bringing in new home buyers as touted by the liberal media. There would be very little change across the board. But if this is all neutral why not try it?

Now for the down side – does this risk another subprime collapse?

On Nov. 17, the FHA released its actuarial report on the Mutual Mortgage Insurance Fund for single-family programs, and while the health of the regulating agency improved, it still has a way to go with its finances.

The FHA boasted a $21 billion improvement since late 2012, after implementing a series of financing changes. The MMI Fund, which handles single-family programs, gained almost $6 billion in value in the past 12 months, printing now at $4.8 billion. Last year it fell short by more than $1.3 billion.

Given that the FHA’s flagship fund – the Mutual Mortgage Insurance Fund  – is expected to remain below the Congressionally-mandated 2.0% threshold until October 2016, a decision to lower FHA premiums in 2015 would undoubtedly be met by considerable opposition from Congressional Republicans,” said Isaac Boltansky, analyst with Compass Point Research & Trading.

“Specifically, we believe that House Financial Services Chair (Jeb) Hensarling, R-Texas, and likely Senate Banking Committee Chair (Richard) Shelby, R-Ala., would publicly and aggressively attack a move to lower FHA premiums in advance of the MMIF clearing the 2.0% threshold,” Boltansky said in November.

Note: I am aware the dates don’t make sense here. They seem to be off (the highlighted 2015 should be 2017), but the overall point is valid. Until the FHA has demonstrated sufficient reserves to back these shaky new subprime homeowners, we should not be reducing the money that flows into the insurance reserves (i.e., mortgage insurance premiums) on some PR gimmick. In fact, given this EO did effect all mortgage insurance premiums to a much lesser degree, it would seem all the FHA would do is undo all their efforts to rebuild their reserves by reducing the premiums this dramatically.

Was the departing Obama regime leaving an economic poison pill they believed the incoming Trump administration would not discover before the financial damage was done? Why the last minute Obama EO given the clear and obvious resistance in Congress?

There is a reason this was number 1 on the Trump EO list. And it would seem they may have found one of many Trojan Horses left by a very frenetic Obama team. Don’t ignore this one as a big nothing burger. I doubt Team Trump would see this as the number one EO in a long list of EOs to com



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