As a housing counselor for the past 30 years who has worked with individuals and families to prepare them for responsible home ownership, I know too many creditworthy families who can afford a home but are unable to purchase one because of overly restrictive lending standards. Not only are lending standards much tighter now than prior to the foreclosure crisis, they are much tighter than even historic norms.
I applaud President Barack Obama’s recent action to reduce the cost of mortgage insurance for loans backed by the Federal Housing Administration. This decision will ensure access to safe and affordable mortgages for more creditworthy households.
The president’s action will reduce the annual mortgage insurance premium by a half percentage point, from 1.35 to 0.85 percent, which will save the average new borrower around $900 each year. According to estimates, this savings will enable up to 250,000 home buyers to purchase a home over the next three years. This will be a big boost for the housing market as we still struggle to recover from the foreclosure crisis.
The move to reduce FHA insurance premiums follows dramatic increases over the last few years. In response to losses suffered during the foreclosure crisis, FHA annual mortgage insurance premiums had risen by almost 150 percent since 2011. Even after the reduction announced by Obama, the new rate of 0.85 percent is still above historic norms of roughly 0.35 percent.
The sharp increases in FHA premiums have made FHA mortgages unaffordable for many families. According to the National Association of Realtors, high FHA premiums priced nearly 400,000 creditworthy borrowers out of the housing market in 2013. Low-wealth borrowers of color, those who have historically depended heavily on FHA loans, have been the most impacted by these increases.
In 2012, 57 percent of all black mortgage applicants and 60 percent of Hispanic applicants applied for FHA loans, compared to just 30 percent of whites. (By contrast, whites accounted for 69 percent of conventional mortgage applications, while blacks and Hispanics made up just 3 and 5 percent of conventional applications, respectively.)
While the goal of increased FHA premiums has been to replenish the fund that backs FHA loans, there is reason to believe these high premiums hurt the fund. The number of loans originated with FHA insurance is down 44 percent from its historic norm, and research suggests the high FHA premium accounts for a 5-percent drop in FHA’s market share.
Further, FHA’s main competitive advantage in the mortgage market, offering loans to borrowers with low down payments, was undermined by Fannie Mae’s and Freddie Mac’s recent announcement they would begin purchasing loans with as little as 3 percent down payments. Without making its loans more competitive (by reducing premiums), FHA will continue to lose market share and further undermine the fund.
FHA loans are 30-year, fixed-rate, fully documented loans, not the risky subprime and predatory loans that helped lead to the foreclosure crisis. A 2014 analysis by the Urban Institute found FHA loans originated in 2012 had a default rate of just 2.3 percent.
Finally, research demonstrates that mortgage loans made to borrowers who receive housing counseling have lower default rates than those made to comparable borrowers who do not. Anyone who is considering purchasing a home or experiencing a temporary problem with their current mortgage is encouraged to visit one of the local, HUD-approved, housing counseling agencies in the metro Atlanta area.
Services are generally provided by these local HUD counseling agencies at no charge to the consumer. You can find a housing counseling agency by using the Consumer Financial Protection Bureau housing counseling locator: http://www.consumerfinance.gov/find-a-housing-counselor/.
Jimmy Bennett is executive director of the DeKalb Metro Housing Counseling Center.
