The federal agencies tasked with boosting homeownership may have finally found their silver bullet when it comes to getting first-time and millennial home buyers off the fence.
Earlier this year, the Federal Housing Administration began reducing private mortgage insurance (PMI) premiums on its loans by an average of $900 a year. While the FHA loans typically come with low down payment requirements, they often have higher monthly payments as a result of the PMI that, unlike conventional loans, continues for the life of the loan, even when 20% equity is reached.
Now it appears the PMI reduction is having the desired effect.
Data from the Irvine, Calif., real-estate research firm RealtyTrac shows that FHA loans were used in 23% of all financed purchases in the second quarter of 2015, up from 19% in the second quarter of 2014. The FHA program, which historically has been aimed at first-time home buyers, lowered PMI for borrowers by about $900 a year and took effect on Jan. 26 of this year. It may be the catalyst for an increase in millennial borrowers and first-time home buyers, according to Daren Blomquist, vice president at RealtyTrac. “So far the FHA premium reduction is having a bigger impact on getting millennial first-time buyers, and other low down-payment borrowers such as former homeowners returning to the housing market off the fence” than other federal programs, Blomquist said in an email.
LoanDepot LLC, the third-largest FHA lender in the country, said that its FHA loan volume for the first half of 2015 is 24% greater than the same period a year ago.
“Lower down payment requirements and lower monthly payments based on reduced PMI requirements has impacted affordability in a positive manner for FHA borrowers,” said David Norris, president and COO of loanDepot. In addition, down payments are on the rise, a sign that FHA borrowers are bringing more cash to the table thanks to their PMI savings.
Overall, the U.S. mortgage market appears to be finally recovering from the real estate crash of 2009-2010, with credit expanding and cash sales declining to their lowest level since December 2009. The Mortgage Bankers Association said that it upped its estimate for 2015 mortgage originations by $71 billion, to $801 billion. It also upped its estimate for 2016 by $94 billion, to $885 billion. “More sales are being financed and more applications are being approved,” said Mike Fratantoni, the MBA’s chief economist. “We expect this trend to continue into 2016 and beyond,” he said.
Home sales for June were up 3.2% over May, according to the latest data from the National Association of Realtors, and are on track to nudge close to 5.5 million homes sold for 2015, the best year for sellers since 2006 and up nearly 10% from a year ago, according to Realtor.com economist Jonathan Smoke. Moreover, the median existing-homes sales price in June rose to $236,400, exceeding the peak median sales price number set in July 2006 of $230,400. It was the 40th straight month of year-over-year price gains. The NAR said that first-time home buyers in June represented over 30% of buyers for the fourth consecutive month, compared with 28% of buyers in June 2014.
In a related development, the lowered FHA premiums may also be playing a part in helping first-time buyers make more competitive offers. RealtyTrac data show that the average sale price of FHA-insured purchases was 102% of the average estimated market price, compared with 101% of the average market price for those same homes at the time of sale for other loan products. “Borrowers using FHA-insured loans are leveraging the savings from the premium reduction to submit higher offers,” Blomquist said.
Still, not all of the federal government’s attempted measures to boost home sales are bearing fruit just yet. Last October, the Federal Housing Finance Agency said it would direct Fannie Mae and Freddie Mac, the biggest buyers of conventional mortgages, to begin buying loans that had as little as a 3% down payment, or a risky 97% loan to value ratio. According to the same set of data from RealtyTrac, despite the increase in FHA loans with low down payments, the overall number of all loans with down payments lower than 3% has barely budged over the year, at about 10.6% of the total conventional loan market. “It doesn’t appear the needle is moving for the FHFA products,” Blomquist said.
To be fair, the Fannie Mae program only went into effect in mid-December, and it was up to individual banks as to whether they would offer a 97% LTV option. Freddie Mac’s 97% LTV program only went into effect in March of this year, says Blomquist. “The loan origination data for the second quarter of 2015 will tell us more,” about the effect for the FHFA products, he said.
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