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As home prices reach an all-time high, the Biden administration is considering an insurance cut for FHA-backed loans to help entry-level and low-income buyers enter the housing market. Mortgage experts say insurance cuts could help, but critics say it could increase prices instead.
The White House’s Affordability Push
President Biden’s affordability plans have mostly focused on increasing the supply of housing across the U.S., as intense competition and a limited supply of housing have pushed up the prices of homes. Easing costs on certain borrowers could help, but housing experts explained to The Wall Street Journal that if you’re lowering costs without addressing the housing supply problem, then it won’t help affordability over the long term.
According to the National Association of REALTORS®, the national median home prices rose 14.2% over the last year to $413,500, going above $400,000 for the first time. Mortgage rates have also jumped to over 5% for a 30-year fixed-rate mortgage. Increases in rates and prices have left some buyers with limited options, especially low-income and entry-level buyers.
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FHA Premium Cut Proposal
Federal Housing Administration or FHA borrowers typically pay an upfront insurance premium and an additional annual payment, collected monthly, on their FHA-backed home loan. The FHA mortgage insurance premium amount, or MIP, varies depending on how much money is borrowed, the size of the down payment, and the length of the loan term.
It’s still unclear how much (or if) the FHA will cut insurance premiums, but industry officials are asking for cuts that could save borrowers $50 to $70 a month, but some say that what the FHA is considering could be lower.
Officials from the Department of Housing and Urban Development (HUD) said they’re considering a cut, but changes within the housing market and overall economic outlook could affect how FHA officials consider whether, when, and how to make changes to FHA insurance premiums.
Mortgage Premium Reductions Could Backfire
Opponents to the proposal say that any cuts to mortgage costs could put homes out of reach for FHA borrowers by encouraging demand and increasing home prices even more. A senior HUD official stated that the department is weighing a potential premium cut but also considering the condition of its insurance fund during the current economic environment.
According to a 2021 independent audit, the FHA’s insurance fund had a net worth of more than $100 billion, which is quadruple the statutory requirement. Bill Giambrone, president and chief executive officer of Platinum Home Mortgage, explained to The Wall Street Journal that the FHA’s net worth is at record levels and could easily accommodate premium cuts.