The Federal Housing Administration (FHA) is planning on reducing borrowing costs for prospective Chicago homeowners; such news is notable, given that it comes after a long line of cost increases from the cash-strapped agency.
What are the specifics of the FHA’s plan, and how will it impact your clients looking for FHA mortgages in Chicago?Here are the three things you should keep in mind:
- The FHA’s Plan Will Tackle Mortgage Insurance – The FHA, which is overseen by HUD and insures mortgages with down payments as low as 3.5 percent, finances its operations via mortgage insurance, which borrowers pay in addition to their monthly Chicago mortgage. So, according to the FHA, a low-down payment mortgage comes with a few more fees as a result. But the FHA will lower those premiums, reportedly dropping them from 1.35 percent to 0.85 percent.
- The FHA Can Afford It – Given that the FHA increased Chicago mortgage premiums in 2013 because of shaky finances, is it really a good idea for them to lower those premiums now in 2015? Though critics are stating that the FHA should keep its premiums at their current level, the agency’s finances have improved dramatically in the last year. According to an independent audit in November, the FHA’s insurance fund (a rainy-day fund of sorts that mortgage premiums fund) was valued at $4.8 billion; that’s up from a $1.1 billion deficit in 2013, and spurred many industry advocates (including NAR and the MBA) to lobby for lower premiums in Chicago.
- Its Impact May be Marginal – It’s unlikely that lower mortgage premiums at the FHA will lead to any kind of surge in homebuyer demand, simply because the savings from the lower premiums may not amount to that much money. According to an analysis by Sterne Agee, a borrower with a 30-year, $100,000 mortgage insured by the FHA would save roughly $25, at most, in their monthly mortgage payments in Chicago. Though Sterne Agee admitted that its analysis was more back-of-the-envelope than anything else, it argued, “This savings will pull some marginal borrowers into homeownership, but it isn’t enough, in our view, to assume single family housing demand increases above our current assumption.”
Most importantly, lower FHA mortgage premiums do not change the greater economic forces currently impacting the housing market in Chicago, namely low savings rates and even lower wage growth. Some consumers will undoubtedly benefit from lower premiums, but it’s unlikely that housing will kick into high gear as a result of the policy.