Following his inauguration, President Trump signed two executive orders. One of them canceled an upcoming premium cut on borrower’s insurance for FHA mortgages. The premium cut, of 25 basis points, would have lowered borrower’s costs at a time when mortgage rates are rising. For the borrower, the premium cut would have held down overall monthly costs on new loans. For the FHA, however, the cut would’ve reduced the amount of the insurance fund held by the government to cover borrower defaults.
The fund must be at least 2% of the government’s mortgage obligations. The insurance fund right now stands at 2.32%, slightly more than the minimum. By canceling the premium cut that was to take effect next Friday, the administration has made a conservative move to increase reserves against defaults.
For the new homeowner, rising rates will push up the entry cost of home ownership. The homeowner will have less buying power with a higher mortgage rate and no reduction in the insurance premium.
This is not a sexy issue, not the kind of thing that ever would’ve been discussed during the campaign, even if the campaign had been normal. It reflects conservative thinking about government-backed obligations. It may reflect administration thinking about the strength of the housing market and the underlying strength of employment. By canceling the cut on the mortgage insurance premium, Trump has provided the government with a greater cushion against defaults by borrowers. You would expect this move to have a slight dampening impact on new home purchases. On the other hand, if you believe that new home sales were artificially stimulated by keeping costs down, this move would prevent a bubble in housing starts.
Because the insurance rate can be cut later, this move does not figured to be a very big deal. It reflects conservative thinking about government obligations relative to the minimum requirement And the rate environment. If employment figures remain strong and real wages hold or increase, a cut in the insurance premium rate could be warranted in the future. As a lender or a guarantor, there is no reason for the federal government to cut its cushion to the minimum.
A buyer would be wise to put borrow less — buy a less expensive home or put up a higher down payment. That would lower the carrying cost, making the loan less risky from a lender’s point of view.