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FHA to Cut Fees, Lowering Rates for First-Time Home Buyers

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The Obama administration cut mortgage-insurance premiums charged under a government program that’s popular with first-time home buyers with little money for a down payment, a move that may ease the burden of rising interest rates.

The annual fees the Federal Housing Administration charges to guarantee mortgages it backs are being cut by a quarter of a percentage point, the Department of Housing and Urban Development said in a statement on Monday. With the reduction, the annual cost for most borrowers will be 0.60 percent of the loan balance.

The change — which could be reversed after President-elect Donald Trump takes office – will force the Trump administration to weigh Republican objections over lower fees against the benefits to home buyers. Republicans have argued in the past that reductions put taxpayers at risk by lowering the funds the FHA has to deal with mortgage defaults. The HUD secretary has the power to set fees. Ben Carson, nominated as HUD secretary by Trump, will appear at a confirmation hearing on Thursday.

The fee cut may hurt bond investors, as it speeds up repayment on some securities. Popular Ginnie Mae securities sold off on the news with their biggest one-day decline since January 2015, when the FHA surprised investors with a similar, but deeper, cut.

Private insurers that compete with the FHA also suffered. Shares of insurers MGIC Investment Corp., Radian Group Inc. and Essent Group Ltd. fell 2 percent to 4 percent after the announcement.

The reduction, which lowers the cost of a home for those who use the FHA, is charged to mortgage borrowers. HUD on Monday said the fee cut would save new FHA-insured homeowners an average of $500 this year. The cut would take effect on Jan. 27.

Republican Objections

HUD Secretary Julian Castro said on a call with reporters that he had no reason to believe the cut would be altered by the Trump administration. Trump’s transition team received notification of the premium cut shortly before its public announcement, he said.

“It’s time the FHA passed along some modest savings to working families,” Castro said.

Carson declined to comment, according to a spokeswoman.

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.

Protecting Investors

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.

The cut announced Monday will likely have less of an impact, in part because mortgage rates have risen sharply since Trump’s election. The effective FHA mortgage rate at the end of last year was about 4.32 percent, according to the Mortgage Bankers Association, compared to 3.71 percent for the week ended November 4.

Ginnie Mae

Some of the cut’s impact could also be washed out if investors in Ginnie Mae-backed mortgage bonds, which include loans insured by the FHA, drive rates up after the cut.

The FHA required a $1.7 billion taxpayer infusion after the financial crisis. In 2015, the agency met its statutory minimum capital requirements for the first time since then.

There is precedent for a change in mortgage fees shortly before a change in leadership. In 2013, Edward DeMarco, then acting director of Fannie Mae’s and Freddie Mac’s regulator, announced that he would direct the mortgage-finance companies to increase fees. Incoming director Mel Watt soon after said he would put a stop to the fee changes.

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