What Changing Economic Conditions Means For Special Housing Financing Programs

Potential Changes Ahead For FHA, VA and USDA Loans

From all the reports the past few months about mortgage rates, the U.S. real estate market has reached what’s been called a “new era” of mortgage rates.

A Housing Wire report suggests that low interest rates are the “new normal” and should eventually bring a “coming wave of new homebuyers.” This is projected to come as interest rates continue to rise throughout 2017.

Rising interest rates and rising mortgage rates could cause more activity and more interest from home buyers in the special housing financing options, such as FHA, VA and USDA loans.

To begin, FHA, VA, and USDA, can offset the impact of rising interest rates. As rates fluctuate, it’s important to for consumers to work with brokers and agents who are informed of the ongoing changes in order to mitigate financial and regulatory changes.

While President-Elect Donald Trump doesn’t seem to always align with party lines, the Republican party has taken a strong stance on how it plans to deal with Federal Housing Administration policies. What this means for special housing financing could begin to unfold as Trump’s policies begin to take shape in his first few months in office.

Less regulatory red-tape, and less financial regulations in place could certainly make it easier for buyers to take advantage of special financing options. To explore the topic of special housing financing, we’ve broken it down by loan category.

Special Housing Financing – FHA Loans

Federal Housing Administration (FHA) loans are specifically designed for first-time home buyers who might otherwise qualify for a typical bank loan. FHA requires a minimum down payment of 3.5 to 10 percent of a home’s purchase price.

Getting more consumers eligible for FHA loans helps increase home ownership. Whether or not borrowers are enticed by this option will be largely dependent on the mortgage insurance premiums.  There was some chatter earlier in 2016 that the FHA would cut its mortgage insurance premiums, but that theory hasn’t played out yet. Ed Goding, the Department of Housing and Urban Development’s principal deputy assistant secretary for housing, was quoted by Housing Wire in November saying that the FHA is not planning on cutting its mortgage insurance premiums. This has caught some backlash in the real estate community, such as pushback from the National Association of Realtors and the Community Home Lenders Association, to reduce premiums.

“It’s clear from this report that FHA can continue taking responsible steps to manage their risk even as they take action to make homeownership more affordable for lower- and middle-income buyers,” NAR President William Brown said.[1] “FHA mortgages are an important option for buyers, but high premiums and lifetime insurance requirements can take that option right off the table.”

On the contrary, the Mortgage Bankers Association thinks the FHA should be more cautious when it comes to cut premiums. MBA President and CEO David Stevens cited the volatility of the FHA’s Home Equity Conversion Mortgages.

“Given the importance of FHA to low and moderate income and first-time homebuyers, the next administration may want to look at accounting for the two programs individually in order to isolate the critically important forward book from the wild swings of the HECM fund,” Stevens was quoted by Housing Wire as saying.

Special Housing Financing – VA Loans

A report released last month by the Department of Veterans Affairs showed VA loans more than tripled post the 2009 mortgage crisis. This report also showed that 9 percent of all home mortgages were backed by the VA (a 2 percent increase from 2004).

VA loans are handled directly through the U.S. Department of Veterans Affairs for U.S. veterans, and have low requirements for down payments – as low as 0 percent in some cases. VA Loans do not require private mortgage insurance and are easier to obtain since they are government backed (less risk to banks). But because of the flexibility of these loans, they are also more competitive.

Despite the fact that VA loans have a significant impact on veterans and their families, a HAC report suggests there is still a disconnect by lawmakers in terms of implementing policies to ensure veterans can take advantage of this type of special housing loan.[2]

Still, VA loans had a strong year in 2016. In fact, there were 707,000 loans backed by the VA in 2016, which is a 12 percent increase from the year prior. That’s also close to double from what the VA was seeing just five years ago.[3]

In 2016 alone, there was $179.1 billion in VA lending, with the average loan amount ringing in at $253,000. Of the 12 percent increase average, 10 percent of that was an increase in purchase loans; 14 percent was an increase of refinanced loans.

As for what the current economic state and next administration means for the future of VA loans, it’s difficult to predict. President-Elect Donald Trump “Veteran Affairs Reform” platform suggests a new era of less red tape and less regulation (which mirrors his other housing and loan regulation stances).[4]

Like most candidates, of course, Trump boasted a pro-military plan to benefit more veterans – but the reality of those campaign promises will take some time to take shape.

Special Housing Financing – USDA Loans

The USDA loans could be particularly important moving into 2017 as the USDA predicts farm incomes will drop 17 percent; crop prices, in particular, have been dwindling, making it difficult to make a profit.[5]

Like FHA and VA loans, U.S. Department of Agriculture (USDA) loans have low down payment and even lower credit/income requirements. For USDA home eligibility, a variety of requirements must be met, depending on the region the loan is applied in.
The Federal Government, which relies on farmers to repay loans, will see the most impact. Yet, lower profits mean more farmers will need loans to keep their operations running.

The other challenge here is that farmers are demanding more loans while lending requirements are getting tighter – showing there may be more demand for USDA loans as farm profits drop.

During one of Trump’s campaign speeches in Iowa, he said: “We are going to get rid of a lot of those regulations that don’t mean anything except cost you a lot of money and a lot of time and, in many cases, you lose your farms over the regulations.”

This attitude seems to follow the mantra of what Trump and the Republicans have been preaching – to end the era of heavy financial regulation.

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[1] http://www.housingwire.com/articles/38535-strong-fha-annual-report-stirs-up-calls-for-mortgage-insurance-premium-cuts

[2] http://www.militarytimes.com/articles/hac-report-va-home-loans

[3] https://www.veteransunited.com/education/tools/stats/

[4] https://www.donaldjtrump.com/policies/veterans-affairs-reform

[5] https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/2016-farm-sector-income-forecast/