Monday, May 23, 2022

HUD may be about to commit a serious policy mistake, again

From Ed Pinto of AEI Housing Center - Earlier this week, Inside Mortgage Finance reported that “[o]fficials at the Department of Housing and Urban Development are having daily discussions about whether to reduce the mortgage insurance premium that applies to FHA loans.”

As our research shows, such a premium cut would stimulate more demand against today’s record-low supply and would thus get easily capitalized into higher home prices. Therefore such a step would do little to nothing for housing affordability.

HUD needs to look no further than FHA's last MIP premium cut in Jan. 2015, which was quickly capitalized into higher home prices for FHA and non-FHA borrowers alike. We described this in greater detail in the op-ed HUD should put entry-level homebuyers first, not special interest groups for American Banker.

To read the op-ed, click here

Rod's Comment: When you are in a deep hole, you should stop digging. There are market forces that have caused the mushrooming of housing prices putting homeownership out of reach of many Americans and then there is government policy that contributed to the crisis. One such policy was the Federal Reserve purchasing too many Mortgage Backed Securities. The goal behind MBSs is to allow banks to sell off mortgages so they’d have more money available to lend to consumers. When that happens, then the market determines their value, and money spend purchasing MBS's is money not invested elsewhere. The market evaluates their value compared to comparable investments. The market evaluates the risk. When the Federal Reserve purchases them, then money for mortgage lending is created out of thin air. Excess money available for mortgage lending leads to higher prices for real estate. The old adage of too much money chasing too few goods applies. Home prices increase.  Now, HUD is going to make the problem even worse. In the short run, lowering the cost of a home mortgage will help some consumers, but cheaper mortgages drive up housing prices. 

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