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FHA Makes A Move Pre-Inauguration! Will “The Donald” Follow With A Tweet?
Christmas in January? What I’d recently put odds of occurring at 50/50 last week came to fruition this morning…perhaps they read this Commentary?!
In a nutshell the FHA decided to reduce MIP on all new FHA loans by 25 basis points. This reduction, from 85 to 60, brings the MIP premium to within shooting distance of its pre-crisis levels. Great news for sure but there are some caveats you need to consider before you do the Triple “Landy”: (Thank you Brian Landy!)
- The FHA last reduced MIP’s by 50 b.p. in January 2015 which resulted in a huge spike in originations. However, in 2015 rates also rallied at the same time from Saudi Arabia playing games with the oil market.. Today’s significantly higher rates, coupled with the lower magnitude of the cut, will mitigate the impact of this.
- This is only an FHA change. There is no impact to VA, RHS (Rural Housing), or PIH (Section 184 Public Indian Housing).
- “Pre-HARP” FHA loans (generally loans closed prior to June 2009) are still eligible for MI grandfathering; these loans can refi one time and retain their current MIP payment.
- Note that Trump and Carson, once inaugurated, could immediately raise MIPs back to their previous levels. There is recent precedent in the housing sector to enact and reverse a change in this fashion. When Ed DeMarco was leaving the FHFA, to be replaced by Mel Watt, he approved a broad number of GSE g-fee reforms. Mel Watt reversed those changes immediately and they never took effect. But it is hard to know how likely a reversal is in this case. I’ll note that Watt was reversing a borrower-unfriendly move, while Trump would be reversing a borrower-friendly move, so a reversal is politically more difficult.
So What Does This Mean For Mortgage Participants?
This move is clearly aimed at certain demographics of the home purchase market (Millennials, Lower Income/Higher DTI Borrowers, Renters) who will now have a slightly easily time qualifying for an FHA loan.
- So the tailwinds for the purchase market just got modestly better. This will offset some of the recent sell off in rates as well.
- There might be some segments of the population which will make a refi more likely but given the sell-off in rates we’ve had plus the relatively modest reduction in MIP (25 basis points) I wouldn’t be looking at this as the start of a new refi boom by any stretch.
Interestingly enough, although I am not a conspiracy theorists at heart, this will also allow FHA to potentially steal some much needed market share from other agencies as production slows. In order to keep the MI Fund at strong levels (well above the Congressionally mandated 2%) you need new originations…and a move like this will keep seasoned loans from skewing portfolio statistics after a rate rise. Well played FHA…well played.
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