Just an hour after President Trump took office, The Department of Housing and Urban Development (HUD) and the new administration suspended mortgage insurance rates on FHA loans (a policy of Obama's which would have taken effect on January 27, 2017). All of the acronyms combined with the financial ramifications can be confusing. So let's break Trump's first act as president down.
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What is an FHA loan in the first place?
An FHA loan is a mortgage insured by the Federal Housing Authority, which is a part of HUD (aka the government covers the mortgage insurance). Didn't know that every mortgage – whether an FHA loan is used or not – requires insurance? Yeah, me either until recently.
These loans are often marketed to first time home buyers but really they are attractive because they require a lower credit score and less money down (it doesn't have to be you first home). As Millennials lag behind Baby Boomers in home ownership at the same stage of life, these are loans that could be helpful to them.
FHA loans originated during the Great Depression with two goals. First, the housing market (as well as the economy as a whole) needed to be stimulated. Secondly, lenders had to be protected too and FHA loans allow people who may not be able to get a loan from a private lender to get the loan while also covering the cost of the insurance to protect the lender.
What was President Obama’s plan?
In the last month of his administration, President Obama basically looked at the economy and the housing market and said #YesWeCan loosen the purse strings. He cut the insurance premium for FHA loans by a quarter of a percentage point, making it .60%. This change would have gone into effect on January 27 (which may be one of the reasons Trump acted so quickly).
So, who cares about a quarter of a percentage point? Maybe people who are living paycheck to paycheck, on a tight budget, while also trying to have a slice of the American dream – home ownership.
On average, FHA borrowers would have saved around $500 a year under Obama's plan (this is according to the Obama administration's numbers crunching; some states, like California, claim it could have been more than $800). The most borrowers could have saved is $1,500 a year. All of this may be small to someone like Trump, but it's all relative to people just trying to make it in this country.
What did President Trump do and why did he do it?
An hour into his presidency, Trump suspended Obama's rate cut for FHA loans. For most lenders, the rate will remain at .85% instead of Obama's .60%. If you were planning on purchasing a home in 2017, you can forget those savings mentioned earlier.
Basically, the recent housing crisis still makes some people nervous (which is a fair point; it was disastrous). While Obama's analysis and decision showed he was confident in the market at this point, a lot of republicans remained concerned.
Apparently, Trump didn't find the housing market stable enough either. His nominee for HUD Secretary – Ben Carson – had expressed some of the same concerns: that too many mortgages were FHA loans as opposed to mortgages through private lenders, who require 20% down on the price of the home.
Per usual in D.C., one side celebrated while the other lamented. What is unique in this situation is the combined bi-partisan surprise. No one expected this to be Trump's first act as President. He campaigned on The Wall, #DrainTheSwamp, Buy American and Hire American, among other things. Sixty minutes into his term, Trump showed everyone that he may be as unpredictable in what he prioritizes as his Twitter feed at 3 a.m.
He's in real estate though, so despite the loss of savings, maybe we can trust that he made the right decision? Or maybe not.
Right after he was sworn in, a letter was sent from HUD to the real estate industry as some form of explanation, stating, "FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers."
Others had a different take. "This action is completely out of alignment with President Trump's words about having the government work for the people," said John Taylor, president of the National Community Reinvestment Coalition (through a spokesman). "Exactly how does raising the cost of buying a home help average people?"
Oh, and by the way? Mortgage rates rose this past November. Is it any wonder millennials aren't buying homes at the same rate as baby boomers once did? Mortgage applications fell by 3% just this week alone.