Trump Adm. Moves to Reduce Chances for Real Estate Meltdown
Written by Steve Byas
Saturday, 28 January 2017


“What a terrible thing to do to American homeowners,” Senator Chuck Schumer (D-N.Y.) said in reaction to the Trump administration’s reversal of a last-minute action by outgoing Obama administration on the FHA home mortgage insurance rate.

................................................................
Just what did Trump do to elicit these hostile reactions?

On January 20, the very day he became president, his administration suspended, indefinitely, a policy announced by the Obama Department of Housing and Urban Development (HUD) on January 9, that would have gone into effect yesterday, January 27. What the Obama administration attempted to do was to cut the mortgage insurance premium by one-quarter of one percent set by the Federal Home Administration (FHA), used by many potential home buyers.

FHA insurance is a federal government program which subsidizes real estate transactions, financed by home loans. The beneficiaries include not only some home buyers, but also banks and those in the real estate industry, such as real estate agents and home builders. It makes loans cheaper, and reduces the risks to lenders who choose to make loans to borrowers who are greater risks.

Bloomberg explained the way it works: “The FHA sells insurance to protect against defaults and doesn’t issue mortgages. It is a popular program among first-time home buyers because it allows borrowers to make a down payment of as low as 3.5 percent with a credit score of 580, on a scale of 300 to 850.”
...............................................................
In the end, these government subsidies create more demand than one would actually have with a free market in lending. This higher demand, of course, causes more homes to be built, and more loans to be made, than would otherwise be the case. Since this increased demand comes from more marginal borrowers, the end result is predictable: more defaults.

Secretary of Housing and Urban Development nominee Secretary Ben Carson stated that outgoing Secretary Julian Castro did not ask him for his opinion before he took the rate-cut action. Responding to a question from Senator Pat Toomey (R-Penn.), Carson said, “I, too, was surprised to see something of this nature done on the way out the door, which of course has a profound effect. If confirmed, I am going to work with the FHA administrator and other financial experts to really examine that policy.”

The Trump administration’s move is actually a baby step in the right direction. Instead of the government policy of driving down interest rates and punishing savers, the government should allow the free market to determine the interest rate. As individuals are able to expect more money in their bank accounts from higher interest rates, we can anticipate more Americans to save. As more money capital is thus formed, this natural increase in the supply of money will lower interest rates. Those wishing to buy a home will save money for a longer period of time before they buy.

Even under a free market, there will still be loans made to borrowers who wind up defaulting. But without government subsidies, we can confidently predict that the number of defaulters will be far fewer. We will not experience the “boom” that comes from such unwise loans; but the good news is that we will not have the horrific “busts” we have seen in this industry, either.

........................................................

http://www.thenewamerican.com/economy/ec...estate-meltdown