HUD premium cut is political posturing
The move by the US Housing and Urban Development (HUD) secretary Julian Castro to reduce mortgage insurance premiums is a politically motivated one designed to pressure the incoming Trump administration. As such it brings the agency into the political arena at a time when non-partisanship should be the goal of one of the foremost housing authorities in the US.
Castro noted in a statement that the aim of the Federal Housing Administration (FHA) was to pass on modest savings to borrowers after four straight years of growth. The cut though will likely reduce the agency’s capital reserves and put it under pressure should the housing market face difficulties in the years ahead.
While the 25bp reduction in premium will likely boost affordability and could save home buyers around $500 a year, it also puts the FHA at risk of needing another government bailout.
“It seems the Obama administration’s parting gift to hardworking taxpayers is to put them at greater risk of footing the bill for yet another bailout,” Jeb Hensarling, Republican and chairman of the House Financial Services Committee, wrote in a statement. “Just three years ago the taxpayers had to spend $1.7bn to bail out the FHA. Lowering premiums to below market rates now only puts the FHA in a more precarious financial condition.”
Hensarling accused the administration of cynically playing politics with the FHA and called the “11th hour rule changes” irresponsible, adding that they endangered the integrity and success of the agency.
Ginnie Mae RMBS securities took a hit on the back of the news, as fears of pre-payment risk increased among investors. Many in the market expressed consternation to GlobalCapital at what they called a “shock move” from the outgoing administration.
Given that Ginnie Mae MBS are a cornerstone of the agency-MBS market, such uncertainty at the beginning of the year does not bode well for investors or the capital markets and undermines the stability of the agency MBS market.
While investors are unlikely to flee the Ginnie Mae market, analysts noted that the move drove the largest one day sell-off of Ginnie Mae bonds since the last premium reduction in 2015.
Republicans will undoubtedly urge the new administration to drop the cuts, which they will claim damage the private market. However, it will be a tough sell given that a reversal would lead to a pricier residential housing market and could kick up a popular backlash from many of the voters who carried Trump to the White House.
This puts the new president between a rock and a hard place — either upset voters or disappoint Republican allies. As far as politics are concerned, it is a shrewd move, but one with obvious partisan motivations that HUD should try to steer clear of.