President Barack Obama moved Wednesday to make it cheaper for first-time and younger buyers to take out a mortgage.
Obama lowered the mortgage-insurance premium for borrowers who have a down payment of just 3.5 percent of the home’s purchase price and finance the rest of the purchase with a loan backed by the Federal Housing Administration.
The reduction is expected to save the typical first-time homebuyer an average of $900 a year on the insurance, the White House said. The insurance is required because they’re financing so much of the purchase and the loans are riskier.
Existing homeowners who refinance into an FHA mortgage will see similar reductions, the White House said.
The White House estimated that the change will help 800,000 homeowners save on their mortgages and 250,000 new buyers save on mortgage payments over the next three years.
Obama, expected to highlight the lower-cost mortgages Thursday during a visit to Arizona, has been under pressure from the housing sector to help lower costs for borrowers seeking to buy with a low down payment – often younger buyers and first-time homebuyers, both a crucial link in home sales.
“We do not see first-time buyers getting into the marketplace. They don’t have a chance to get onto that first rung of housing,” said Chris Kutzkey, president of the California Association of Realtors.
While mortgage lending rates have been near record lows for several years, that has benefited the most creditworthy borrowers, who are often the wealthiest of homebuyers. The middle-income segment of the market, with higher debt loads, has faced tougher lending standards. Stagnant income has crimped its ability to put more down toward a home purchase.
“Mortgage underwriting standards have been overly stringent,” said Lawrence Yun, chief economist for the National Association of Realtors.
The premiums rose sharply after the financial collapse and have not come down even as the economy and the housing market have improved.
“It’s almost as if government is ripping off the consumers,” complained Yun, noting that premiums were raised to minimize risks to taxpayers of borrowers defaulting on government-backed loans. “But what has happened is they were punishing current borrowers for the sins of past mistakes. Current borrowers did not harm the market, but they are paying the excessively high premiums.”
One consequence is the shrinking number of new homeowners. Over the past four years, first-time homebuyers shrank as a percentage of all FHA loans – from 56 percent down to 39 percent, he said.
First-time buyers are a key part of the real estate chain, needed so existing homeowners can sell and purchase nicer, perhaps newly built homes.
“Future homebuyers are paying a higher expense than is necessary and that is having an effect on housing,” said David Stevens, president of the Mortgage Bankers Association.
Ironically, the premiums went up from 2009 to 2011, a period when Stevens was the No. 2 man at the Federal Housing Finance Agency, the regulator of mortgage giants Fannie Mae and Freddie Mac.
In a related move, the new head of the Federal Housing Finance Agency, former North Carolina Democratic Rep. Mel Watt, took steps in late December to make it possible for Fannie and Freddie to purchase loans that had down payments as low as 3 percent instead of the prior limit of 5 percent.
The move, similar to lowering FHA premiums, was designed to spur more first-time homebuying, boost the economy and compete with FHA loans.
“This sluggish recovery in housing has to change course for the economy to continue its growth trajectory,” Stevens said. “So in the short run, we would view premium reduction as a positive for the economy.”
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, and Senate Banking Committee Chairman Richard Shelby, R-Ala., have in the past opposed lowering the premiums. They want to see less government involvement in housing finance and fear lower premiums mean taxpayers are still on the hook if a large number of loans go sour, as they did from 2007 to 2009.
The Obama administration has the power to lower premiums on its own and wouldn’t need legislation or congressional approval to act alone.
Another concern for would-be buyers and sellers is whether the longstanding mortgage-interest tax deduction might be removed or scaled back for the wealthy. Both of these ideas have been floated in discussions about how to fix the nation’s long-term fiscal imbalances.
“We really want to see no change to the tax incentives,” said Kutzkey of the California real estate group. “A lot of people are sitting on the fence. . . . They don’t know if they can move up.”
Economic conditions are increasingly favorable for a return to normalcy in housing. The economy is growing at a brisk pace, falling gasoline prices leave people with more spending power and hiring picked up sharply in 2014. A tight rental market also may soon push more people into considering home ownership.
“Apartment rents are rising at the highest pace in seven years, which means some of the renters . . . will seriously consider buying,” said Yun of the national real estate group.