FHA Insurance Price Cuts May Have Led Borrowers to Buy Higher-Priced Homes

According to new research by the American Enterprise Institute (AEI) International Center on Housing Risk (ICHR), the FHA’s January price cut was largely capitalized into the purchase of higher priced homes. The research reviewed over 2.5 million first-time homebuyer loans.

In January 2015, the Federal Housing Administration (FHA) announced a reduction of 0.50 percent to its annual mortgage insurance premium. Along with this announcement, the FHA also noted that there would be positive benefits for middle-class and lower-income homebuyers, particularly first-time buyers.

"This step is part of the President’s broader effort to expand responsible lending to creditworthy borrowers and increase access to sustainable rental housing for families not ready or wanting to buy a home," said The White House
Office of the Press Secretary.

Edward Pinto, the research author and co-director of AEI’s International Center on Housing Risk said that the effort to reduce mortgage premiums did little to expand access to middle-and lower-wealth borrowers, while the National Association of Realtors (NAR) and other housing interest groups reaped the benefits of the higher home prices.

“Lots of people have been locked out of the market, particularly lower-wealth borrowers and borrowers of color, by the high prices at FHA,” said Julia Gordon, director of housing finance and policy at the Center for American Progress. “The premium cut “does put homeownership within the reach of more people.”

With 93 percent of the share pickup coming at the expense of Fannie Mae and Rural Housing Services, the FHA’s biggest competitors. The FHA was forced to accept business from private mortgage insurers and these loans had greater risk than the ones they replaced.

“Market reaction to the MIP reduction is a text-book case of how the additional buying power created by liberalized credit undertaken during a seller’s market, largely gets absorbed in price, without much increase in accessibility,” Pinto said. “Published reports regarding the spring home market confirm it was one favorable to sellers, putting upward pressure on prices. “

Pinto concluded that this research confirmed previous work by former FHA economist from the mid-20th century with how these liberation scenarios work out.

“In markets favorable to the seller, there is a tendency for liberalization of credit terms to be captured in price increases rather than result in improved accessibility, Pinto said.

Interested in hearing more about the FHA? Don't miss MReport's exclusive interview with FHA chief Ed Golding in our July issue. Can't wait until July? Click here to see a preview now!