The U.S. Department of Housing and Urban Development (HUD) announced today that the Federal Housing Administration (FHA) will reduce the annual premium that most borrowers pay on FHA loans by 25 basis points, or 0.25%.
Like Fannie Mae and Freddie Mac, FHA doesn't make loans, but rather provides a safety net for lenders. The fee charged on an FHA loan is a "mortgage insurance premium" FHA takes in exchange for insuring the percentage of the loan above 80%. The premiums fund FHA's Mutual Mortgage Insurance Fund, which helps FHA protect against losses incurred if borrowers run into financial troubles.
"After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," HUD Secretary Julian Castro said.
The new premium schedule applies to loans with an insurance endorsement date of January 27, 2017 or later. This change is expected to save the average home buyer $500 per year in insurance costs.
UPDATE 1/21/2017: The Trump administration has suspended the premium cut indefinitely. While many REALTOR groups praised the cut as a means to help more borrowers access FHA loans, other industry groups viewed the cut as too small to mean big savings for borrowers (FHA estimated the cut would save borrowers an average of $500 per year). Industry economists have cautioned that is it wise to examine any last-minute decisions by previous administrations that could be motivated by politics. In addition, it is worth noting that FHA took a taxpayer funded bailout in 2013 because its reserves were not sufficient to meet its obligations to banks on defaulting loans. At least with respect to FHA reserves, it appears the President is choosing to err on the side of caution.