Trump & Housing: President Hammers Middle Class With FHA Insurance Reversal

President Donald Trump, who paints himself as a champion of the middle class, hammers middle-income home buyers with FHA policy reversal.

Within hours of being inaugurated, Donald Trump took a swipe at low-income and middle-class Americans — many of whom voted for him — by scrapping a planned mortgage fee reduction for FHA loans.

In January, then-president Barack Obama approved the reduction, which would have saved FHA borrowers an average of $500 per year. But the mortgage insurance reduction was short-lived. In one of his first acts as president, Donald Trump decided to keep FHA mortgage insurance rates at the higher level.

As a result of Mr. Trump’s decision, home buyers who use FHA loans in 2017 (and possibly beyond) will continue to pay the higher premium, and some will simply be priced out of owning a home.

It was a strange move for a brand-new president who, while on the campaign trail, often painted himself as a champion of the middle class. The Home Buying Institute views Trump’s policy reversal as an error in judgment, and an unnecessary shift given the FHA’s current financial health.

Here’s how we got to this point.

FHA Insurance Fees Were Raised After the Housing Crisis

The Federal Housing Administration (FHA) insures home loans made by mortgage lenders in the private sector. This insurance protects lenders against financial losses that result when homeowners default and stop making their mortgage payments.

The FHA suffered tremendous losses during the housing market collapse and subsequent recession. They paid out so many insurance claims to mortgage lenders that their capital reserves were wiped out.

In order to restore their capital reserves, which are required by Congress to stay a certain level, the FHA raised its mortgage insurance fees starting in 2014. This, along with other policy changes, helped put the FHA back into the black and restored the agency’s capital reserves to the required level.

In 2016, the Department of Housing and Urban Development (HUD) reported to Congress that the FHA’s Mutual Mortgage Insurance Fund capital ratio rose to 2.32%, and that it “exceeded the congressionally required 2 percent threshold.”

HUD and Obama Reduced Fees When FHA Recovered

Now jump ahead to January 2017. During that month, HUD officials, with a blessing from the Obama administration, announced they would reduce the annual mortgage insurance premium home buyers pay when using FHA loans.

The reduced insurance rate would have applied to most borrowers using the program to buy a home in 2017, saving them an average of $500 per year (though sometimes much more than that).

Essentially, HUD and President Obama were bringing the Federal Housing Administration back in line with its primary purpose — to make homeownership more affordable to more Americans, particularly those in the lower and middle income brackets, and those with less-than-perfect credit scores.

But thanks to Donald Trump, the FHA insurance fee reduction never came to pass. This will affect the housing market in 2017 by reducing access to mortgage financing.

Donald Trump Scrapped It Shortly After Taking Office

On his first day in office, Donald Trump halted the planned reduction in FHA mortgage insurance. Trump’s executive order, signed within hours of his inauguration, kept the cost of government-backed mortgage insurance at the elevated level put in place after the housing crisis. In other words, it prevented FHA insurance premiums from dropping back down to pre-crisis levels.

Trump offered no explanation for the move. It happened swiftly and without any fanfare, below the radar of average Americans. Perhaps it was part of his often-touted plan to eliminate “all things Obama.” Maybe it was the brainchild of Stephen Bannon, Trump’s top advisor who wants to dismantle what he refers to as the “administrative state.”

It’s hard to say what the true motivation was, given the current administration’s penchant for misinformation and “alternative facts.”

Trump’s controversial housing market decision could affect a large number of moderate-income and middle-class home buyers in 2017, because the FHA loan program is very popular among this demographic. The Federal Housing Administration backed about 17% of all mortgage loans made in the U.S., according to the most recent figures published by HUD. Most of those were first-time buyers seeking a low down payment (FHA allows for a down payment of 3.5%).

Add to this the fact that home prices have been rising across the country in recent years, and you essentially have a plan for reduced homeownership among the lower and middle income brackets.

According to Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute: “The FHA does a disproportionate amount of loans for first-time buyers, minority buyers, low-income buying; it’s hugely important.”

The National Association of Realtors (NAR) estimated that 30,000 to 40,000 Americans who would have been able to afford a home purchase with the anticipated lower fee will now be unable to buy a house. Another 700,000 to 800,000 buyers will end up paying more for their mortgage insurance than they would have if the Obama-era reduction had been allowed to take place.

The NAR has since lobbied the Trump administration to reinstate the premium cut “as soon as possible.”

It is somewhat ironic that Donald Trump scrapped the insurance reduction. During his presidential campaign, he often lamented about how the middle class in American was getting “crushed.” Why, then, would he sign an executive order to crush them further?