Lowered mortgage insurance premiums expected to help current and future borrowers

A presidential plan to give more Americans their own American dream.

By Charlene Crowell | 1/21/2015, 11:22 a.m.
A presidential plan to give more Americans their own American dream.

Charlene Crowell

Charlene Crowell

About 800,000 homeowners whose mortgages were backed by the Federal Housing Administration (FHA) could save $900 annually on mortgage costs, due to a small reduction in mortgage insurance (MI) premiums. President Barack Obama made the announcement during a recent speech in Phoenix, one of the cities hardest hit by the nation’s housing crisis.

By reducing the MI rate by only a half-percent, the move is also expected to enable 250,000 new homebuyers to afford an FHA mortgage. Administration officials predict that in coming years, the fee reduction will save borrowers with similarly-financed mortgages billions of dollars and also boost the housing market’s long-term recovery.

In his address, the President connected the financial concerns of everyday people to his new initiative designed to spur broader housing recovery.

“It’s not just the economy turning around,” said the President. “It’s turning around the lives of hardworking people. . . . Buying a home has always been about more than owning a roof and four walls. It’s about investing savings, and building a family."

The move is also likely to benefit consumers of color who tend to secure FHA-backed mortgages far more than private, conventional ones.

In 2013, the most recent mortgage data available from the Home Mortgage Disclosure Act, although conventional mortgage originations rose slightly from the previous year, 2012, African-American consumers nationwide received only 2.3 percent or 36,903 loans. In 2012, the same data point was even smaller, with only 26,500 such loans.

To add some context to this low number of private, conventional mortgages, the Chicago suburb of Calumet City with a population of 37,240 is larger than the number of loans made to the nation’s African-American homebuyers last year.

Typically, 30-year conventional mortgages are free from mortgage insurance premiums when home down payments are 20 percent or larger. Over the course of the loan, these are the mortgages that wind up costing borrowers less money.

By contrast, borrowers who can afford a monthly mortgage payment but only have a low down payment have frequently turned to FHA. One term on these government-backed loans is to charge a mortgage insurance premium.

Housing and consumer advocates were swift to praise the President’s announcement. Mike Calhoun, Center for Responsible Lending (CRL) President said, “This decision is financially sound, socially responsible, and good policy all at once. Homebuyers, homeowners and taxpayers will all benefit.”

Similarly, Julia Gordon, Director of Housing Finance and Policy at the Center for American Progress noted, “The President correctly observes that owning a house is about far more than putting a roof over your head. It’s also about stability and community for you and your kids – creating a place to call home. What’s more, for many families, homeownership builds wealth that can be passed down for generations.”

Yet not all housing stakeholders were in agreement. In a prepared statement issued on the heels of the President’s address, the U.S. Mortgage Insurers took a different view and issued a statement that in part said, “Mortgage insurers putting their own capital at risk should be preferred to government risk taking, consistent with the principles put forward by the Administration for housing reform. The MI industry has the capacity and capability to further reduce taxpayer risk and lower costs for many home buyers while expanding access to mortgage credit.”

While this segment of the housing industry may have the capacity to lower costs for many prospective homebuyers, the post-recession consumer experience did not translate into more mortgage access. The combination of higher pricing for lower-wealth borrowers, along with historically-tight credit standards dramatically limited access to homeownership for low to moderate-income borrowers and continued to pose a serious challenge to the mortgage market as a whole.

Limiting home purchase opportunities also has larger economic consequences. New homeowners fuel consumer spending, especially on big-ticket appliances. These major purchases then enhance local governments’ ability to deliver services as a result of higher sales tax revenues.

Most importantly, lost opportunities for homeownership means fewer families will have the opportunity to have that investment build wealth to pass down across generations.

As President Obama observed, it is time to help “more families afford having their own piece of the American Dream”.

(Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at: Charlene.crowell@responsiblelending.org.)