Most people don’t think about the Federal Housing Administration as often as REALTORS do, but when you ask someone over 30 how they bought their first home, most will smile and say, “I got an FHA loan.”
Since FHA is just a happy memory for many, it is understandable the agency’s newly implemented fee reduction was only modestly celebrated when it went into effect Monday morning, Jan. 26. I can tell you though, for hundreds of thousands of aspiring U.S. homeowners who have been priced out of the housing market, the policy shift is a life-changing opportunity.
Let me be clear: REALTORS here in Nevada and nationwide support responsible lending to qualified buyers. It’s essential for building strong communities.
There is a vocal misguided minority who will argue this price reduction will turn back the clock to the days when underqualified buyers received loans they could never repay.
This couldn’t be further from the truth. FHA is not lowering its underwriting standards or luring irresponsible borrowers into homeownership, instead it is enabling qualified buyers to safely enter the market without exposing taxpayers to unnecessary risks. The new policy lowers the cost of FHA’s mortgage insurance premiums by 50 basis points, which translates into an average savings of $900 a year for future homeowners and current borrowers who refinance.
The time is right for this reduction, because until Monday, FHA loans were overpriced relative to the low risk of qualifying borrowers. When private investors retreated from the mortgage sector in the wake of the worst housing crisis since the Great Depression, FHA increased its insurance activity to keep money flowing into the market.
Without the FHA, our ongoing economic recovery here in hard-hit Southern Nevada would be taking even longer.
FHA began raising its mortgage insurance premiums in 2011 to counter the expected losses that would come from the increased activity. By 2014, the fees were up by 145 percent, an amount overpriced by four times the anticipated risk to FHA’s funds. It was clear the pendulum had swung too far by 2013, when nearly 400,000 creditworthy borrowers were priced out of the housing market because of high FHA premiums.
Economists at the National Association of REALTORS estimate that by lowering the annual premiums by 50 basis points, from 1.35 percent to .85 percent, FHA will price-in an additional 1.6 million to 2.1 million U.S. renters, along with many trade-up buyers. This could result in 90,000 to 140,000 additional annual U.S. home purchases.
More affordable FHA loans will also have a positive impact on our all-important and still-too-scarce first-time buyers, who have been entering the market at a lower rate than normal in recent years.
Over the past four years, as the fees increased, the percentage of first-time buyers using FHA-backed loans shrank from 56 percent to 39 percent.
The new home-buying activity and cost savings to borrowers will further strengthen the local housing market. An increase in first-time homebuyers and more affordable mortgages will help spur more residential construction and help create new jobs in the housing sector.
As everyone knows, we need that here in Southern Nevada.
FHA’s fee reduction is financially sound, socially responsible and a good public policy. The lower prices will enable more qualified borrowers to enter the market, and a new generation of homeowners to smile and say, “I bought my first house with an FHA loan.”
Keith Lynam is the 2015 president of the Greater Las Vegas Association of REALTORS (GLVAR) and has been a local REALTOR for 11 years. GLVAR has more than 11,500 members. For more information, visit www.lasvegasrealtor.com.