What do you do when a quick rise in mortgage rates suddenly threatens to tame home buying demand from subprime borrowers who, despite the lessons from the past, are still purchasing homes, en masse, with only 3.5% down payments and just enough monthly cash flow to cover mortgage payments? Well, if you're the Obama administration then you simply socialize the problem and force those higher mortgage costs on taxpayers. Anything less would just be a hateful attempt to deny minority and low-income citizens their "right" to home ownership.
And while the Obama administration isn't directly passing out tax dollars to subprime borrowers to make their monthly mortgage payments, its recent decision to lower the FHA's annual mortgage insurance premiums by 0.25% is essentially the same thing since tax payers are still on the hook for the same risk but receiving lower premiums in return. Per Bloomberg:
The FHA doesn’t make mortgages. It sells insurance, paid by borrowers, on loans protecting investors in case of default. The program allows borrowers to get a mortgage with a down payment of as little as 3.5 percent and a credit score of as low as 580, on a scale of 300 to 850. That makes it one of the most forgiving mortgage programs and popular among first-time home buyers.
Some in the real-estate industry have been calling for another fee cut and heralded Monday’s move.
“Dropping mortgage insurance premiums today will mean a whole lot more responsible borrowers are suddenly eligible to purchase a home through FHA,” William Brown, president of the National Association of Realtors, said in a statement.
The FHA last cut premiums two years ago. That cut, which came as rates dropped and lowered the annual fee for most borrowers to 0.85 percent from 1.35 percent, led to a wave of refinances.
We vaguely remember something like this happening about 8 years ago and, while we'll have to check our files, our recollection is that it didn't work out all that nicely.
Of course, the move was intended to offset the recent ~60bps rise in average 30-year mortgage rates...because we simply can't sit idly by while markets attempt to actually work.
The private mortgage insurers, who have to compete with federally subsidized rates, shed about 5% of their market cap on the news.
Meanwhile, at least one Congressman, representative Jeb Hensarling of Texas, noted to Bloomberg that the Obama administration's last minute parting gift to the U.S. taxpayer put them at "greater risk of footing the bill for yet another bailout."
Representative Jeb Hensarling of Texas, chairman of the House Financial Services Committee, called the fee reduction “irresponsible.”
“It seems the Obama administration’s parting gift to hardworking taxpayers is to put them at greater risk of footing the bill for yet another bailout,” Hensarling said.
But we wouldn't worry too much, the FHA only required a $1.7 billion taxpayer bailout last time around...no big deal really.