Killing the Housing Recovery One Bill At A Time

(Updated August 12th,2010) H.R.5981, a recently introduced bill will have some deep implications when it comes to the future of the housing recovery.
This new piece of legislation will give FHA the authority to make changes to the current way of collecting mortgage insurance premiums.

The Housing and Urban Development Agency announced their plans to change insurance premiums for FHA loans in order to pad their reserves to cover anticipated losses. Now the way HUD will be doing this is by reducing the cost on one end and increasing it on the other, resulting in less qualified buyers in the future.

The decrease will come in the form of the up front mortgage insurance premium which up until now is 2.25%. As of October 4th the up front premuim will be reduced to 1%. Great news if it was to stop there yet HUD will be increasing the their monthly cost for mortgage insurance from .55% to .90% for a 30 year loan.
These changes may not seem significant but as I mentioned earlier, many potential home buyers will be taken out of the running because of this change.

Let’s compare the cost of these changes vs the status quo.
For a $300,000 loan amount:

 
The result is an increase of about $70 dollars per month for the same exact loan.
That’s a deacrease in purchasing power of about $10-$15,000!
So today you are pre-approved and ready to go for $300,000 but a month from now that approval will be adjusted to only $285,000.

What this means for you?

If you didn’t have a reason to buy a home today, now you do and fast.
This move by HUD will result in a deacrease in qualified buyers, especially first time home buyers who have been purchasing the mid to lower end homes in the market. An increased supply of inventory will cause home values to be lowered to compensate for the decrease in purchasing power.

Yes HUD will be increasing their reserves but at what cost to the already weakened housing market? H.R. 5981, which has already passed through Congress is headed to the President’s desk and is expected to sign it, allowing FHA and HUD to make these changes.