President Obama’s announcement that the Federal Housing Administration will lower the cost of its home loans by one-half of a percentage point (.50 basis points) should be very welcome news. Home loans will now be within reach for many more hard working and responsible families who have been left on the sidelines of the economic recovery.
This cost reduction is good for homeowners and would-be homeowners, communities still struggling to recover from the recession, and the economy more generally. The National Association of Realtors reports the first-time homebuyer has been largely absent during the economic recovery. The inventory of homes at the lower end of the price spectrum — those traditionally accessed by the first-time homebuyer — are the most difficult to find
Further, low- and moderate-income borrowers, and black and Hispanic households in general, have a particularly hard time obtaining mortgage credit today.* The lower cost of credit for FHA borrowers moving forward means that more homes will be affordable for more people. That means an average annual savings of $900 on a typical FHA loan of $180,000 — meaning that up to a quarter million new home buyers will now, for the first time in a long while, be “in the money” to purchase a home.
This also means that over the next several years, two million homebuyers will save on their monthly housing expense, enabling them to invest more in other aspects of their families’ future, such as education. Not only will individual families benefit from this new housing affordability, but a virtuous cycle is created that will begin to further stabilize neighborhoods and strengthen the overall economy.
As a result of many actions over the past six years, the economy and housing market have made significant progress. Now is the time to share those gains and opportunities more broadly with the American people, while at the same time continuing to strengthen the housing market recovery.
All of this is possible now because of the foundational changes to the housing-finance system initiated post-financial crisis by the Obama Administration. As a prime example, the Consumer Finance and Protection Bureau has put in place rules of the road that mean the dangerous and predatory lending products that led to the crisis can no longer be offered.
And FHA took its own steps to ensure prudent underwriting standards were put in place, along with a strong risk-management culture that has been embedded into the operations of the agency. FHA actions included raising mortgage insurance premiums to be sure that anticipated losses, plus reserves for unanticipated costs, are accounted for. Even after the reductions announced by the President, FHA mortgage premiums will remain 70 percent higher than before 2009.
Further, because of underwriting and other policy changes made, the performance of loans being insured today (and in the last several years) is far stronger. FHA will still be charging more for much better loans than in the years before the crisis. All this means FHA can reduce costs for borrowers, while continuing to add substantially to its reserves and financial health.
I know firsthand how hard it is to make rapid and complex changes to a large and important government agency like FHA. I am extremely proud of the work that has been done that enables these mortgage insurance premiums to be lowered. And I am even more proud of the FHA team that made it happen. Their work is government service at its best.
A strong FHA can now, in turn, strengthen families, communities and the economy.
— Carol Galante, I Donald Terner Distinguished Professor in Affordable Housing and Urban Policy, and former Assistant Secretary for Housing/FHA Commissioner
* Sharygin, C. A. (2013). Class and Color in the Credit Crunch. Washington, DC: Urban Institute.