FHA Premiums Cut - What Does This Mean?

  • January 14, 2015

President Obama announced last Thursday morning, January 8, 2015, his intention to boost the housing marketing by requiring the Federal Housing Administration (FHA) to reduce their annual premiums by 50 basis points, from 1.35% to 0.85%.
 
This news of lowering mortgage insurance premiums has brought an onslaught on mixed reviews, much debate, and a slew of information. When obtaining a mortgage loan through FHA, many loans require the borrower to maintain mortgage insurance. This insurance protects the lender against losses because FHA will pay the lender if the homeowner defaults on their loan. It is important to understand the pros and cons of this direction given by Obama and what it could mean for the future of the housing market and the nation’s economy.
 
A drastic decrease in insurance premiums for FHA home loans is expected to bring a surge to the recovery of the economy and housing market. Obama also discussed how the reduced fees could save a family up to $900 a year and make homeownership a reality for more first time homebuyers. Those in favor of cutting the FHA premium are standing by the fact that this alone could help accelerate the growth of the housing market by opening the door of homeownership to more of the nation. If more people enter the housing market and spend money on real estate, this will give the economy a boost as money is brought into the economy’s circulation. Lowering fees allows people in a new, lower income bracket to be able to afford a home.
 
However, many do not believe the lowering of FHA premiums will help our economy at all. In fact, those who oppose the implementation of this change are pointing to the fact that FHA has been unable to maintain sufficient capital reserves in the past and will be even less likely to do so after more borrowers are able to enter the housing market. Taxpayers recently had to bailout the FHA when they did not have sufficient funds. Allowing them to serve more borrowers would only set up the economy for another crash. Insurance premiums were set up to establish responsible lending practices. Working households would be able to afford a house but have to pay for mortgage insurance as a promise to pay back the home loan. With these fees lowered, the potential for less responsible lending practices increases.

 

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