Pointless and Futile

Eakinomics: Pointless and Futile Eakinomics has a track record of scrutinizing Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) because their histories are replete with danger to the economy (see housing bubble and financial crisis) danger to taxpayers (see the taxpayer takeover of Fannie and Freddie, the Treasury bailout of the FHA Mutual Mortgage Insurance Fund, or MMIF, and more), and failure of their missions. Dangerous and futile should be their collective motto. So, I read with some trepidation the White House announcement that Vice President Harris and Department of Housing and Urban Development (HUD) Secretary Fudge would have a major announcement in support of low-income homeownership. What new danger would appear on the horizon? As it turns out, the initiative looks more pointless than dangerous. What, exactly, did they do? FHA will lower the mortgage insurance premium from 0.85 percent to 0.55 percent for new borrowers. FHA does not issue mortgages. It insures lenders against the risk of default by lower-income borrowers and this premium pays for that insurance. As the White House fact sheet points out, the move will save “homeowners with new FHA-insured mortgages an average of $800 per year, lowering housing costs for an estimated 850,000 homebuyers and homeowners in 2023.” Normally, one would be concerned about two things. First, the reduction reduces cash inflow to the MMIF. In the past, the fund has been thinly capitalized and premium reductions put the taxpayer at greater risk. This, fortunately, is not currently a problem. The second issue is that the FHA competes with private-sector mortgage insurers and this runs the risk of undercutting their book of business. This remains a concern. But the larger issue is that this is a tiny reduction in the cost of homeownership at the same time the Fed is engaged in rate increases that will easily more than offset a subsidy of under $70 a month. Indeed, this will not move the needle on overall home sales at all. Moreover, the problem at the lower end of the market has been the limited supply and a subsidy to demand does nothing to alter that problem. So, in the end, it is a public relations event of little real consequence for housing affordability in the United States.