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In recent months, two changes were made to government financing that were intended to improve credit availability. Mortgage lenders who took part in the 4th quarter Survey of Mortgage Originators agreed that both programs, the new 3% down payment loan at Fannie Mae and Freddie Mac as well as the reduction of fees at the FHA, will provide a boost to the housing market.
In November, the FHFA which oversees Fannie Mae and Freddie Mac, announced that it would once again allow the two entities to finance loans with as little as 3%. These loans would be for first-time buyers, require buyer education, require strong underwriting, and would be priced to reflect their risk. As discussed in an earlier blog, this 3% product would only be accessible by a relative slim portion of the market. A 71.4% majority of lenders who participated in the 4th quarter survey felt that the 3% product will help to expand access to credit.
In early January, the FHA announced a reduction in the annual mortgage insurance premium charged from 1.35% to 0.85%. The vast majority of respondents indicated that this would boost production with a production-weighted average increase of 8.5%. 10% of respondents indicated that the change would simply shift demand from the GSEs to the FHA as lender overlays would limit new entrants to the market. No respondents indicated that the fee reduction would not have an impact.
NAR Research estimated that the pricing change would price in an additional 90,000 to 140,000 potential homeowners who cannot afford to purchase in the current market. The 8.5% increase that lenders cited correlates to an increase in purchase volume of more than 300,000 purchase mortgages[1]. Overlays are a wild card in the current market that could hamper the impact of the rate reduction, though the administration has made overtures to this end.
FHA and GSEs have made significant changes to improve credit availability in recent months. Lenders who took part in the 4th quarter survey indicate that these changes should help to improve access and affordability to consumers. Overlays will remain a headwind, limiting the full benefit of these changes, until the FHA and GSE can ameliorate lender concerns about certain legal risks.
[1] The 8.5% change is assumed equal for purchase and refinance volume. This might not be the case as the question asks for the impact on “total” volume suggesting that the unit impact on purchase volume could be smaller or larger.
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