2

Some media report that Trump raised mortgage rates on homeowners by overturning a fee cut. The fee cut wasn't to go into effect until 1/27/17, a week after Trump was inaugurated. The cut wasn't even announced until January 9th of this year.

Time reports that the fee cut is an "Obama-era policy", and that it's a "renewal" not just a first-time lowering of rates.

Can someone please clarify? This is a very new subject to me. I'm trying to get my head around whether this was a negative thing by Trump, or a questionable move by Obama on his way out the door, to make Trump look bad.

Thanks.

Obama fee reduction (1/9): https://portal.hud.gov/hudportal/documents/huddoc?id=17-01ml.pdf

Trump reduction suspension (1/20): https://portal.hud.gov/hudportal/documents/huddoc?id=17-07ml.pdf

4

You didn't define what it means "a renewal or a first time thing", so the answer is both "no" and "yes".

  1. YES, Obama's change was

    • the first time the MIP annual rate dipped below 0.90 since the end of the financial crisis, when it was increased to 0.90.

    • the first time it was decreased in rising interest rate environment since at least before 2000 (the last cuts were 2001 during rate cuts and Jan 2015, when rates were historically low and so far staying that way).

      Please see explanation below why the interest rate environment matters here and what the difference was.

  2. NO, the rate has been cut before, in Jan 2015 (1.35% to 0.85%)

    However, this two cuts are not equivalent, either fiscally or politically.

    This fee isn't arbitrary - its goal is to provide capital needed to cover mortgage defaults; when that capital is missing, you get what happened in 2013, when $1.7 billion from the U.S. Treasury was needed to bail out FHA (as noted in Bloomberg article you linked).

    Fiscally, 2015 cut was due to low defaults, that correlate to low interest rates (basic mortgage default modeling 101), which in turn helped the FHA fund remain solvent and even in surplus in 2015.

    However, the rates will rise in 2017 (e.g. on floating rate mortgages), because of FED raising interest rates. That would lead to increased mortgage defaults, meaning that the fund would be at risk. Note that Obama administration and his HUD did NOT - as far as I can find - provide any financial projections backing the reduction.

    The rate was also cut earlier (2001), but that was during real estate bubble when HUD didn't have a concern over solvency that it had since 2007.

    Politically, as has been pointed out, the cut was specifically timed to hamper incoming Trump administration - it was a big policy change NOT discussed with transition team, and not announced in advance.


Rate history

(from http://themortgagereports.com/17092/fha-mortgage-insurance-premiums-mip-change-2015)

The mortgage fee reduction of 0.25% (0.85% to 0.60%)

Prior to January 2008 : 0.50% annual MIP plus 1.50% upfront MIP
October 2008 : 0.55% annual MIP plus 1.75% upfront MIP
April 2010 : 0.55% annual MIP plus 2.25% upfront MIP
October 2010 : 0.90% annual MIP plus 1.00% upfront MIP
April 2011 : 1.15% annual MIP plus 1.00% upfront MIP
April 2012 : 1.25% annual MIP plus 1.75% upfront MIP
April 2013  : 1.35% annual MIP plus 1.75% upfront MIP
January 2015 : 0.85% annual MIP plus 1.75% upfront MIP

Note that the FHA consistently increased its annual MIP charges while also tweaking its upfront MIP in order to remain solvent and with sufficient reserves.

The moves were not enough.

In late-2013, for the first time in its history, the FHA was forced to draw close to two billion dollars from the U.S. Treasury. Since that time, however, the FHA's fortunes have reversed.

Fewer loans have gone bad and, because of a change in how the FHA cancels MIP, the agency has been collecting bigger mortgage insurance premiums from its homeowners, over a larger number of years. As a result, the FHA now shows a positive capital reserve balance.

This is why the FHA could reduce its FHA MIP in 2015 for the first time since 2001.

  • Thank you for the detailed response. Are there sources that confirm that announcements are normally made in advance for decisions of this type? How does one find the historical projection documents that justify previous decisions of this type? You say, the "2015 cut was due to low defaults, that correlate to low interest rates [which] helped the FHA fund remain solvent and even in surplus." But this was the same case in 2013. What was different that caused it to need a bailout, despite consistently increasing MIP rates? – aliteralmind Jan 22 '17 at 15:23
  • MIP rates don't cover 100% of needed shortfall. There were a LOT of defaults back then, despite falling rates, due to economy fundamentals. – user4012 Jan 22 '17 at 15:35

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