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FHA Premium Cuts Could Spur Savings, but is That All?

graphs-and-moneyBorrowers could potentially save an average of $446 a year under the new mortgage insurance premium reduction set to take effect later this month for loans backed by the Federal Housing Administration. That’s the conclusion of a new analysis by ATTOM Data Solutions released Thursday.

ATTOM based its conclusions on the national median sales price of $185,000 for homes via FHA loan and a monthly house payment of $1,205 based on the current annual FHA insurance premium of 85 basis points. With the proposed cut of 25 points from the FHA insurance premium of, the monthly payment on the same median-priced home would be $1,168. That’s a difference of $37 a month, or $446 a year.

According to ATTOM, the biggest potential annual savings from cuts to the premium would occur along the California coast and in Hawaii. FHA buyers in San Jose, Santa Cruz, and Alameda, as well as in Honolulu, could save between $1,200 and $1,500 a year. On the other end, buyers in several Midwestern counties, such as Bay County, Michigan, or Peoria County, Illinois could save between $190 and $250 a year.

The move to reduce premiums, however, tends to have a stronger effect on the market than monthly savings, ATTOM reported.

“The last FHA premium cut two years ago helped to trigger a relatively short-term jump in home sales to FHA buyers, who are typically first time homebuyers without much saved up for a down payment,” said Daren Blomquist, senior vice president at ATTOM. “Prices of homes backed by FHA loans also accelerated higher in the wake of that last premium cut, although that premium cut occurred concurrently with a drop in mortgage rates, a scenario that is less likely this time around.”

According to ATTOM, home sales with FHA-backed loans rose to a more than six-year high of 169,000 in Q3 2015 after a premium cut in the preceding January. Following that 50 basis point reduction, the share of home sales using FHA loans increased for three consecutive quarters, from 12.5 percent in Q4 2014 to 16.7 percent in Q3 2015.

However, some contend that the previous FHA premium cut did not reach their intended goals of giving buyers more purchasing power, the report stated. An analysis by the American Enterprise Institute of property-level FHA and conventional loan data in 23 counties across 12 states found that about half of the additional purchasing power from the premium cut “either was lost through price increases or used by buyers to go up-market.”

A second result, the report cited, is that FHA fell short of its goal of spurring 250,000 first-time purchases over the three years after the premium cut.

“Although FHA’s first-time buyer volume increased about 180,000 in the first year after the cut, only an estimated 35,000 of those buyers were incentivized by the lower premium to enter the market,” the report stated. “The remainder were either poached from other government agencies or represented trend growth in the market unrelated to FHA’s premium cut.”

About Author: Scott Morgan

Scott Morgan is a multi-award-winning journalist and editor based out of Texas. During his 11 years as a newspaper journalist, he wrote more than 4,000 published pieces. He's been recognized for his work since 2001, and his creative writing continues to win acclaim from readers and fellow writers alike. He is also a creative writing teacher and the author of several books, from short fiction to written works about writing.
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