Trump’s First Executive Order and Your Mortgage

Gentle Readers,

You remember when I learned last summer that changes in FHA Mortgage Guidance would alter my ability to acquire a mortgage. My debt to income ratio has not improved significantly in the past 6 months, as anticipated. I did not think I would be able to pay off $45000, commonly referred to as SL2.

One of Trump’s first acts as the new President of the United States was to make mortgages harder to acquire for middle class folks.

The previous administration had a policy that Trump’s Administration blocked immediately upon assuming office. The policy was on track to reduce the cost of mortgages slightly for many home buyers. The policy was not yet in effect, but was imminently going to impact folks.

What policy are we talking about?

HUD sent a letter suspending the 0.25 % point premium rate cut for FHA-backed loans.  Nearly 20% of mortgages are FHA-backed. The beauty of the FHA is that their criteria make it accessible for more people to access capital necessary to buy a home and enjoy the tax benefits of home ownership. Their most-touted benefit is the significantly lower down-payment. As low as 3.5% of the purchase price. Homes in my high COL area regularly go for over $400,000. A standard 20% down payment is $80,000. A 3.5% down payment is $14,000. It is not hard to see why so many Americans need the help afforded by FHA.

How big is this impact?

Frankly, not big at all. The cut Obama attempted to enact would have saved homeowners with a $400,000 mortgage $58 per month.  Not insignificant, but not overwhelming for most people shopping for a mortgage.

The housing market in parts of the country, mine included, have been on fire lately. The prices are sky-rocketing. Some folks look at high prices and want in. It is unclear if this action will throw water on the housing bubble, but it might.

The most fascinating part for me is that Trump has re-made the fortune he was gifted by understanding the benefits our tax code gives to real estate. Having learned every trick in the book, is he going to encourage the IRS to re-write the book? May the US end a half-century long policy of encouraging home ownership through the tax code? If they did, would that be a bad thing necessarily?

A lot remains to be seen, but I think these tea leaves are impossible to read just yet.

Would you be happy to amend US tax code and move away from a home ownership model?

 

Author: ZJ Thorne

Lesbian on the path to Financial Freedom

  • Home ownership isn’t the end-all be-all, and I don’t think pushing a home ownership model nationwide is necessarily the right course but it’s also not as simple as a yes or no question. Housing in this area is atrocious so anything that makes it even harder for the middle class (lower and upper) in our HCOLA further is a bad thing in my book. Rent here is astronomical – for an equivalent or even smaller size home, it would cost $3-4000 a month. A MONTH. That kind of monthly payment would wreck our cash flow and our savings rate. Obviously this is both a personal assessment and the overall market is also affected by quite a few other variables but essentially anything that makes every day life for the majority of other people who still need to live and work and feed their families more difficult to afford gets a sideeye from me.

    • I agree with you on all of those points. If there was a way to stop propping up home-ownership via tax code that did not harm low and middle income folks, I would be intrigued to learn more about it. I have a hard time imagining it.

      In my high COL area, if I had a down payment, my mortgage+pmi would be less than rent in most neighborhoods.

  • Emily Nance Jividen

    Unfortunately, I think you’re going to see tax breaks for regular folks trickle away, and tax breaks for businesses increase. That’s the sort of thing that my state’s done already….there are very few credits and deductions for individuals, and most of them revolve around business credits. The overall tax rates went down, the standard deduction went up a little, but the erosion of credits and deductions meant most people pay a bit more in taxes than they used to, while higher income individuals got a significant break.

    • That’s an excellent point. Does your state have adequate deductions for families? Or just business-owners? I’ve always filed as a single person and just recently as a business owner, and I am not sure what taxes are like as a family/person with dependents. I think this is just the tip of the iceberg for what will be done.

  • So here’s the fascinating part for me. Instead of attacking what is commonly coined “welfare” (food stamps, unemployment, etc.) right out of the gate, he’s gone after one of the biggest form of welfare that the government offers — mortgage incentives. And if his policy is to balance the budget, that’s a great way to do it.

    At what expense is the real question, right? FHA is easy enough to dismiss for 80% of homeowners: “They should have saved more.” But what will all homeowners say when they can’t deduct as much interest or property tax when they file their taxes?

    • Also, it’s worth noting that my “great” means effective. NOT something I want. 😉

      • I read your great as opinion-neutral.

    • I’m also very intrigued by how folks will respond once they pay taxes next year.

  • First, in full disclosure, we are more or less apolitical in the Escapadian home. However, we do realize that owning a home is a very expensive proposition, and that any assistance one can get with their mortgage is certainly helpful. When we first got our mortgage we could barely rub two pennies together. In fact, if we had two pennies to our name we would have thought we were rich!

    With that said, however, we are currently $20 trillion in the hole as a country. From what I understand, both Fannie and Freddie (the main underwriters of FHA mortgages) are close to being completely insolvent which will be a huge anchor on the economy as a whole. They will need to be saved somehow. I could be incorrect here, but I believe Trump’s plan (not agreeing or disagreeing with it) is to try and privatize both Fannie and Freddie to stop the bleeding and release us taxpayers from the financial burden.

    How all this will play out is anyone’s guess.

    • That’s an interesting angle. Clearly, I am political, but with this I cannot see whether this is a net good or bad.

      I’m curious to see if this has the intended effect on insolvency. I would think making the underwriting criteria stricter would be better than this.