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Why Trump Cutting The Decrease of Mortgage Insurance Is A Good Thing

Posted by James Schiller on January 24, 2017
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Recently a well educated sharp friend of mine asked me to please explain why one of President Trump’s first actions as president was to suspend the cuts to mortgage insurances premiums for FHA loans is a good thing?


She asked me specifically because I was in the mortgage industry for over 13+ yrs, although I am not in the mortgage industry any longer, I am a full time real estate broker in Charleston SC. So I think I am qualified to speak on the topic.


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So here I go. First we have to explain what makes FHA loans different from a conventional loan. FHA loans are government backed (insured really) meant originally for vets coming back from war in the 40s, before VA loans were conceived and became the norm. The loans were meant with sympathy and compassion in mind, which is an admirable endeavor to help people and families achieve “the American dream” easier and become home owners. Through loosening credit worthiness guidelines, and requiring less money down. There is one fatal flaw in this concept, not everyone is meant to be a home owner. Trust me I know, I have seen it all. Owning a home is a commitment, as is the commitment it takes to purchase a house and more specifically ask a bank/lender to loan you tens or hundreds of thousands of dollars or millions in the case of super jumbo loans (fairly rare).


But before we get into why it is a good thing that Trump suspended the cuts to FHA mortgage insurance we need to remind readers about the recession that crippled our nation for years, and almost brought down the world with it. The real reason we had a housing crash followed by a full on financial meltdown was because of Bill Clinton’s legislation. I bet you were told it was because of other things like bad loan products, greedy mortgage people, and Wall St. In some cases you’d be right. In the 1990’s house democrats came to Bill Clinton claiming banks were discriminatory to low income borrowers and minorities. Bill then went to the heads of the large banks & Wall St. to work this out. The banks said in simple terms I don’t care who the people are asking for money either you have great credit, reasonable down payment, a good steady job history, and good rental history (otherwise known as the 4 pillars of fundamental home ownership & responsibility) or we aren’t giving you money regardless who you are. Makes sense right? What you may not know is banks just temporarily give you money, and then they sell the loans to investors (through bonds) on Wall St. If banks just lent out money and didn’t sell them they would eventually run out of money so they have to sell them. If I am the bank and I have what’s known as “paper in my portfolio”, that isn’t of good quality no one will buy them then I am stuck not only having to service those loans, but I also do not have anymore money to lend out (which is how banks make money). You can probably put the pieces together now, that is why banks and lenders are and should be SO strict with rules to lending. It is their right, and no one should blame them. Now back to Bill Clinton, he told the banks if you loosen lending guidelines so more people can more easily qualify for purchasing a home I will make sure we buy the paper; i.e Fannie Mae and Freddie Mac. The two largest GSEs (government sponsored entities). Essentially saying, “we got your back”, just make it easier for people to buy, AND that is what caused the housing crisis and subsequent financial crash that brought down our economy. Now that banks knew they could unload their “bad paper”, that they otherwise wouldn’t normally be able to they went hog wild giving money to just about any and everyone. Then traders, and other Wall St. money guys got greedy and began to manipulate the debt even worse which just compounded it, but that’s another story.


Now, back to the original question. Why is it a good thing that Trump stopped the reduction of mortgage insurance premiums?  FHA loans are generally an easier loan to get approved for because the required minimum down payment is only 3.5% and credit restrictions are less stringent. So borrowers who get an FHA loan are already qualifying on a lesser set of standards than others. If ANYTHING their credit files should be scrutinized more so. If you’re getting a house with only 3.5% down statistics show you’re more likely to walk away from the house because you have less to lose than other do. If you’re being given special exceptions because your credit isn’t up to par that’s a problem already. Poorer credit already shows you have had a history of not paying your bills on time which is probably a reflection on your ability to retain gainful employment or be responsible with money. So why would anyone want to lend money to someone who can’t pay their bills on time, or keep a good job for any length of time, or pay their rent on time? Yes, I know everyone falls on hard times myself included, but that just means you have to wait, you have to save more money, and fix your credit to prove you’re worth the risk.


That said, the FHA takes a mortgage insurance premium (just like a conventional loan does when people borrow over 80% LTV ), in order to off set the losses the lender takes when they have to foreclose on people who do go “belly up”, and can’t pay anymore. Which is more likely to happen with those getting FHA loans. It’s a safety net if you will. Just with any insurance – the premiums are meant to help pay for the losses. So now that I have explained that, it has probably become more clear that if you make the mortgage insurance premium higher instead of reduce it, then there is more money available to cover the losses incurred due to foreclosures and the government (i.e the tax payers) aren’t left holding the bag.


WHY DOES THIS MAKE MORE SENSE?



1.) When someone defaults on their mortgage (through foreclosure or short sale) with an FHA government loan, if there isn’t sufficient funds in “the bank” through the collection of mortgage insurance premiums those losses then get passed onto tax payers.


2.) By requiring a larger mortgage premium makes people who want to purchase have to be better quality borrowers, which in turn reduces the number of bad “belly up” defaulted loans.


So; making it easier for low income families to purchase is not only risky it is very irresponsible. Cutting the required amount of mortgage insurance opens us up as a country to more chances of having another housing crisis, and the tax payers are left paying for it. You’d think with me being a Realtor I would be in favor of anything that makes it easier for me to sell homes, but having barely survived the housing crash I know that I do not ever want to go through that again. I am sure most agree. The last time we loosened fundamental lending principles: people, banks, lenders, financial institutions, and Wall st took advantage of it. When they broke from convention of requiring people to have great credit, and at least 10% down, then all hell broke loose.


SUMMARY



We should NEVER make it easier for people to get a home through weakening the fundamental common sense lending practices that have worked for over hundred years. Regardless who you are. It is a blessing, a privilege and a commitment to being a responsible home owner. I do agree with VA loans that our military should be given something “special” for their sacrifice, but aside from that there should be no exceptions. EVERYONE, should be held to the same standard which requires you have a certain reasonably respectful credit profile (or score as they call it in today’s market), reasonable down payment, good history of retaining gainful employment, and proof you can pay your rent on time each month. PERIOD. It has been shown over and over again, that when you deviate from those principles as humans we are not able to control ourselves, our greed, and make prudent choices.  So Trump’s decision to suspend the reduction cut to mortgage insurance premiums ensures that we as hard working tax payers 1.) aren’t in jeopardy of another housing crash 2.) left holding the bag paying for defaulted loans for borrowers that had no business getting a loan in the first place.

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