Well, we’re just one day into Trump’s second term and there are already rumblings of a new housing policy.
Even though it’s still talk, at least there’s some talk going on, especially early on.
Trump issued an executive order yesterday, asking all departments and agencies to deliver emergency monetary assistance to help Americans in this “cost of living crisis.”
This includes pursuing measures to reduce housing costs while expanding housing supply.
While we are building ourselves into this inventory problem it won’t happen overnight, there are quick fixes. One of these is adjusting the premiums for FHA federally refinanced loans.
First A Quick Background on FHA Annual Mortgage Insurance Payments (MIP) for All Years
2000-2008: 50 basis points (bps)
2008: 55 bps (Mortgagee Letter 2008-16)
2010: 90 bps (source)
2011: 115 bps (source)
2012: 125 bps (source)
2013: 135 bps (source)
2015: 85 bps (source)
2023: 55 bps (source)
Back in early 2013, the FHA began requiring borrowers to pay an annual mortgage insurance premium for the life of the loan.
Before the change, annual insurance premiums on FHA loans would be waived if the loan balance dropped to 78% of the original purchase price.
This makes them less attractive compared to other options where mortgage insurance typically starts at 80% of the loan-to-value (LTV) ratio.
Additionally, the FHA raised premiums as mortgage lending increased, making FHA loans more expensive and less attractive compared to other options, such as mortgages.
The annual MIP for typical FHA loans below 5% has fallen and the 30-year loan term has increased fivefold since 2008, just as the subprime mortgage crisis began.
It has been as low as 50 bps (0.50%) for many years and rose to 135 bps in 2013 before finally being reduced two years later.
In 2015, it was cut to 85 bps for the same borrower and another 30 bps in 2023 to 0.55%.
Now there is talk that both of these could be fixed under Trump’s second term.
How Low Are MIP Annual Payments?
MBA President Bob Broeksmit issued a statement today following Trump’s order.
He said he supports Trump’s order to improve housing supply and affordability and noted that the MBA supports removing “unnecessary regulatory red tape.”
Most importantly, he noted that the FHA should remove its life of the loan premium requirement.
In addition, he said they should also “consider a reasonable reduction in FHA mortgage insurance premiums.”
According to Broeksmit, this will help reduce housing costs for low- to moderate-income Americans.
Now my question, before I get to the issue of the life of the loan, is how low can the annual MIP go?
If it’s already down to 55 bps for the average FHA homebuyer, up from just over 50 bps in the early 2000s, could it drop even further? Another 25 bps lower?
Remember, it has already been cut several times from as high as 135 bps back in 2013, including a 30-bps cut as recently as 2023.
Perhaps the forward MIP, currently set at a whopping 1.75%, should be targeted instead?
Ironically, Trump actually blocked the FHA premium cut that was supposed to happen at the start of his first term in 2017.
But those were different days, and now we have a serious housing crisis.
With mortgage rates above 7% to start Trump’s second term, he will likely be more open to solutions that lower borrowing costs.
If the mortgage rates are out of his hands, the next best thing may be to lower the premiums, which can also lower the monthly mortgage costs.
Mortgage rates are also often much lower on FHA loans, making them even more attractive when premiums are cut.
The only real caveat to this whole thing is if the loans are short lived.
Does Eliminating the Life-of-Loan MIP Really Help?
Now about that life-of-the-loan MIP issue. Obviously, it’s not a good idea to pay for mortgage insurance, especially if your LTV is less than 80%.
But that’s currently the policy for most FHA loans. The big question though is whether this will help new home buyers?
For example, you may find a situation where someone buys a home this year with an FHA loan and the mortgage rates drop by a large amount.
At that time, the borrower may refinance the FHA into a conventional loan to get rid of their mortgage insurance entirely.
So in that sense, it may not really mean much if the loan is kept for a short period of time.
Meanwhile, existing FHA borrowers would benefit greatly if they could waive the annual MIP and still stick with a 30-year mortgage fixed at 2-3%.
Of course, if mortgage rates don’t improve, new home buyers can benefit from cheaper mortgages relative to their predecessors.
And while they hold the loan, it will also be cheaper if we assume that the premiums are also cut.
This could increase FHA’s market share, which has reduced capacity at Fannie Mae and Freddie Mac in recent years.
The two actually offer comparable loans with 3% down compared to the FHA flagship at 3.5%. In addition, mortgage insurance is canceled at 80% LTV.
This has made FHA loans less attractive to home buyers recently, unless their credit scores are below 620, which is Fannie and Freddie’s cutoff.
Stay tuned for this one, it’s going to be interesting!
Read on: 2025 real estate predictions
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