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The federal government announced one of its first major policy decisions and created a new hurdle for affordable home ownership in New York City: it suspended a decision to lower mortgage rates for mostly middle-class home buyers.
Last week, a new study by the National Center for Suburban Studies at Hofstra found that this policy change will cost homebuyers an extra $4.1 million each year in New York City in increased insurance premiums. That’s just over $1,130 per borrower.
Why FHA mortgages matter to first-time home buyers
The decision affects Federal Housing Administration mortgages, which are government-backed and administered by U.S. Department of Housing and Urban Development. These types of mortgages tend to be more accessible than conventional ones, because they allow lower down payments of as little as 3.5 percent. Homebuyers with less-than-perfect credit ratings also have an easier time getting FHA mortgages. In fact, 82 percent of FHA mortgages in 2016 were for first-time homebuyers nationwide.
In exchange for the government guarantee on their loan, borrowers must pay a Mortgage Insurance Premium to the FHA either monthly or yearly. While conventional mortgage borrowers generally only need to pay private mortgage insurance premiums until their equity reaches 20 percent of their home’s value, FHA mortgage holders must continue to pay their premium for the life of their loan, which is up to 30 years.
Before the financial crisis, FHA mortgage premiums were a relatively low .50 percent. But after the crisis, FHA reserves were exhausted, and in order to replenish funds, premiums were raised to as much as 1.35 percent. The proposed reduction by then-HUD Secretary Castro would have brought premiums down to between .55 and .60 percent. However, the incoming Trump administration argued that the rate reductions could have put taxpayers on the hook if FHA mortgages defaulted. HUD called for further analysis.
The impact in New York City
The need for FHA mortgage products with lower down-payment requirements is especially pressing for working- and middle-class families in high-cost markets like New York City. To purchase a home with a conventional mortgage at the average New York City sales price of $575,500, a homebuyer would need to pay $115,100 to cover a standard 20 percent down payment. Such a high down-payment amount would be extremely difficult for many otherwise creditworthy New York City families to meet.
FHA loans are disproportionately used in communities of color, where home prices are (relatively) affordable. This disparity is especially prominent in New York City, where, according to a 2012 study by the Woodstock Institute, New York City borrowers in communities of color are 3.1 times more likely to receive government-backed loans than borrowers in predominantly white neighborhoods. FHA loans account for 13 percent of New York City mortgages each year, but usage varies widely at the neighborhood level. According to the Hofstra study, of the 3,614 FHA mortgages in New York City in 2015, only two were used to finance home purchases in Manhattan. However, in the Bronx, FHA loans constitute 35 percent of mortgages, as well as 18 percent in Queens, 16 percent in Staten Island, and 12 percent in Brooklyn. In some neighborhoods such as Southeast Queens and Central and Western Bronx, FHA loans constitute nearly half of all mortgages.
Another barrier to affordability in NYC
The effects of the Trump administration will be felt more acutely by potential home buyers in New York City than other parts of the country. Nationally, HUD estimates that the the average FHA borrower can expect to pay an additional $500 per year in mortgage insurance fees. However, because home values (and therefore mortgage amounts) are higher in New York City, the average cost to New Yorkers will be $1,130 per year.
In a city undergoing profound affordability challenges, our overheated housing market has already shut out the majority of New York City from access to homeownership. The move to suspend FHA mortgage insurance premium reductions is a missed opportunity to increase access and affordability for homeowners.
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Caroline Nagy is the deputy director for policy and research at the Center for NYC Neighborhoods.