Friday, January 23, 2015

Obama Cuts FHA Premiums

Recently, legislation was enacted that would allow FHA premiums to be cut. From a pro and con point of view, it would seem that President Obama's cutting FHA premiums depends on two things: borrowers and lenders views of the issues.

Housing Drives a Stable Economy

For many generations, housing has been one of the major driving forces that keep the US economy stable. In 2008, the housing bubble burst due to mortgaging practices and mortgage loan approvals under less secure mortgaging terms. In 2009, President Obama recognized the need for reforming the mortgaging industry to avoid bank bailouts. Interest rates on home loans plunged to their lowest point in nearly fifty years. However, banking reforms of 2009 were not met by mortgaging banks with much support. Thus, various types of mortgages, FHA included, became more difficult to approve. With the president cutting FHA premiums, both borrower and lenders benefit from more flexible, affordable premiums. For the borrower, lower, affordable FHA premiums encourage a boost in home sales. For lenders, a larger pool of borrowers means increased revenues.

Borrowers and Lenders Views of Cutting FHA Mortgage Insurance Premiums

Certainly, when taxpayers are required to bailout the FHA, some measure of recompense is required. The basic idea that mortgages must be insured in the event of foreclosure has long been a bone of contention for borrowers who also provide FHA bailout funding. In effect, it appears to be a doubling of the cost of FHA mortgage insurance premiums. In 2008, with a glut of foreclosure resulting from ARM mortgage practices, the US government required individual taxpayers to bail out banks experiencing high rates of foreclosures. However, what was not immediately apparent was that many of these foreclosures were previously insured by mortgaging banks that also approved ARM loans.

The view of borrowers may appear to be another opportunity to take advantage of the increase in home buying and also the ability to insure FHA mortgages against foreclosure.

The view of lenders is based on their investment in an FHA mortgage that offers affordable premiums while also experiencing protection should foreclosure occur.

The answer to the question of whether a cut in FHA premiums will help or hurt depends on known, peripheral issues related to the banking and mortgaging industries, as well as underwriters of these mortgages as investors.

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