The Biden Administration’s reduced Mortgage Insurance Premiums (MIP) for FHA home loans took effect this week. With rates rising once again, DC home prices continuing an upward climb, the possibility of rate cuts beginning in December, and looming recession, what impact will the action have?

DOES IT MATTER IN DC?

We take a look at both sides of the equation in Washington DC.

FHA dropped the annual premium charged to mortgage borrowers by 0.3 of a percentage point. Its mortgage insurance premiums lowered from 0.85% to 0.55% for most new borrowers, and FHA is touting the move as an average savings of $800. per year for a projected 850,000 new homebuyers.

Proponents say the cut makes homeownership more accessible and affordable for some of the nation’s working families, particularly households of color for whom FHA-insured mortgages have been a cornerstone for access to homeownership. The action is intended to help address historic disparities in homeownership, where homebuyers of color have been underrepresented. The Mortgage Bankers Association has been calling for this reduction since 2021.

Critics counter that the cut will only result in higher home prices that will wipe out those savings, as happened following the last such cut in 2015.

From the Washington Examiner:
Tobias Peter, assistant director of the American Enterprise Institute’s housing center, argued that market conditions are not favorable for a mortgage insurance premium cut;
“Housing supply remains at historically low levels at 4.0 months and is even tighter for entry-level homes. A premium cut would thus get absorbed into higher prices and do little for affordability,” he said in a blog post. “An MIP cut would amount to a massive wealth transfer from FHA’s capital reserve fund, which ultimately protects taxpayers, to realtors and homeowners in largely FHA neighborhoods.”

The FHA slashed mortgage insurance premiums by an even more aggressive half-point in January 2015, the last such cut. At the time, the FHA predicted that the cut would lead to some 250,000 first-time buyers and would save buyers about $900 per year. Peter said that research showed that home prices actually grew 2.5% faster in FHA neighborhoods and just 17,000 first-time homebuyers entered the market in the years after the cut.

“Instead of helping first-time buyers, the beneficiaries of FHA’s 2015 MIP cut were existing homeowners, who profited from higher asset prices, and realtors, who received an estimated windfall of around $2.8 billion due to increased commissions,” Peter wrote.

WHO QUALIFIES FOR THE FHA CUT TO MIP?

The 30 basis point annual MIP reduction will apply to almost all Single Family Title II forward mortgages insured by FHA. Further, the reduction applies to all eligible property types, including single family homes, condominiums, and manufactured homes, all eligible loan-to-value ratios, and all eligible base loan amounts.

The devil’s in the details for Washington DC FHA home buyers, where the median single family home price is $927,500. for detached properties and $577,500. for attached homes (Feb. 2023 market data).

In the District of Columbia, the 2023 FHA borrowing limit is $1,089,300 for a single-family home, but the new FHA reduction changes with the loan term (30 years vs 15 years, for instance), and base loan amount:

The reduction is even less meaningful weighed against the increasing prospect of a 2024 recession, and potential rate cuts, which the home buyer may be unable to take advantage of due to refinancing costs, higher downpayment if FHA is not chosen as the refinanced loan type, or loss of the reduction upon refinance in future years.

As of Friday, March 24, 2023, the national average 30-year FHA mortgage APR is 6.76%. And rates continue to climb.

• UPDATE NOV 19, 2023

Current FHA loan rates

MIP IN TWO PARTS

There are two parts to FHA mortgage insurance: An Upfront Mortgage Insurance Premium equal to 1.75% of the loan amount and must be paid at closing (either in cash or financed into the loan), and FHA Annual MIP, which is calculated as a percentage of the outstanding loan balance (which includes upfront MIP if you roll it in, so you’re then paying a premium on top of a premium). Lenders typically assess the annual MIP in 12 equal payments included in a borrower’s monthly mortgage payment. MIP is no longer tax deductible, as is PMI, and MIP does not drop off a mortgage loan when equity reaches 20% as does PMI. It is in place for the life of the loan.

CONVENTIONAL PMI

Conventional PMI is paid on mortgage loans with down payments lower than 20% of the loan amount. It is calculated using the loan amount, credit score and LTV as the main factors in determining monthly PMI payment. PMI can be cancelled or removed if the loan balance is paid down below 80% of the original appraised value. It is automatically removed by the lender once it reaches 78%, if you haven’t already stopped it. There are no-PMI conventional loans with lower down payment requirements currently available to qualified borrowers.

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