Well, we’re just one day into Trump’s second term and there are already rumblings of new residential housing policy.
While it’s still all just talk, at least there is some talk going on, especially so early on.
Trump issued an executive order yesterday, calling on all departments and agencies to deliver emergency price relief to help the American people during this “cost-of-living crisis.”
This included pursuing actions to lower the cost of housing while expanding the housing supply.
While building ourselves out of this inventory crisis won’t happen overnight, there are quicker fixes. One of those is adjusting premiums on government back FHA loans.
First a Quick Background on Annual FHA Mortgage Insurance Premiums (MIP) Through the 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.
Prior to the change, annual insurance premiums on FHA loans would be removed once the loan balance fell to 78% of the original purchase price.
This made them a lot less appealing compared to other options where mortgage insurance typically rolls off at an 80% loan-to-value ratio (LTV).
In addition, the FHA raised premiums as loan defaults increased, making FHA loans more expensive and less attractive relative to other options, such as conforming loans.
The annual MIP for a typical FHA loan with less than 5% down and a 30-year loan term increased five times from 2008, just as the mortgage crisis got underway.
It had been as low as 50 bps (0.50%) for many years and rose as high as 135 bps in 2013 before finally being reduced two years later.
In 2015, it was cut to 85 bps for the same hypothetical borrower and another 30 bps in 2023 to 0.55%.
Now there’s talk that both of these might be adjusted under Trump’s second presidential term.
How Low Can Annual MIP Premiums Go?
MBA president Bob Broeksmit released a statement today following Trump’s executive order.
He said he backed Trump’s order to improve housing supply and affordability and noted that the MBA supported removing “unnecessary regulatory red tape.”
Most importantly, he noted that the FHA should eliminate its life of loan premium requirement.
On top of that, he also said they should “strongly consider a reasonable reduction to FHA mortgage insurance premiums.”
Per Broeksmit, this would help reduce housing cost for low- to moderate-income Americans.
Now my question, before I get to the life-of-loan issue, is how low can the annual MIP go?
If it’s already back down to 55 bps for the typical FHA home buyer, just above the 50 bps in the early 2000s, can it go even lower? Another 25 bps lower?
Remember, it was already reduced several times from as high as 135 bps back in 2013, including a 30-bps reduction as recently as 2023.
Maybe the upfront MIP, currently set at a hefty 1.75%, should be targeted instead?
Ironically, Trump actually blocked an FHA premium cut that was due to take place at the very start of his first term back in 2017.
But those were different days, and now we actually have a major affordability crisis in housing.
With mortgage rates over 7% to start Trump’s second term, he will likely be a lot more open to solutions that lower borrowing costs.
If mortgage rates are out of his hands, the next best thing might be lowering premiums, which can also lower monthly housing costs.
Mortgage rates also tend to be lowest on FHA loans, making them even more attractive if premiums are also cut.
The only real caveat to this whole thing is if the mortgages are short-lived.
Does Removing the Life-of-Loan MIP Actually Help?
Now about that life-of-the-loan MIP issue. Obviously, it’s not ideal to pay mortgage insurance, especially if your LTV is well below 80%.
But that’s the policy at the moment for most FHA loans. The big question though is would this help new home buyers?
For example, you might get a situation where someone buys a home this year with an FHA loan and then mortgage rates drop by a sizable amount
At that point, the borrower would likely refinance out of the FHA into a conventional loan to ditch their mortgage insurance completely.
So in that sense, it might not actually mean much in reality if the loan is only kept for a short period of time.
Meanwhile, existing FHA borrowers would benefit greatly if they could ditch the annual MIP and still hold onto their 30-year fixed mortgages set at 2-3%.
Of course, if mortgage rates don’t improve, newer home buyers can benefit from a cheaper loan relative to what it was before.
And while they hold the loan, it would also be cheaper assuming the premiums are also cut.
This could shore up market share for the FHA, which ceded volume to Fannie Mae and Freddie Mac in recent years.
The pair actually offer a comparable loan with just 3% down versus the FHA’s flagship 3.5% down. In addition, the mortgage insurance is cancelable at 80% LTV.
This has made FHA loans less appealing to home buyers recently, unless their credit scores happen to be below 620, which is the cut off for Fannie and Freddie.
Stay tuned on this one, it’s going to be interesting!
Read on: 2025 mortgage and real estate predictions
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