Obama Proposes Hikes in Cost to Use FHA Loans, Cuts in Mortgage Interest Deduction

February 15, 2011

By Robert Freedman

The fiscal year 2012 budget that the Obama administration released Monday, Feb. 14, 2011, hikes the annual FHA mortgage insurance premium and takes a third stab at a twice-rejected proposal to trim the value of itemized deductions, including the mortgage interest deduction, available to upper-income households.

The president’s budget proposes cuts to 200 programs, including the majority of the programs administered by the U.S. Department of Housing and Urban Development, which saw its budget cut by almost 3%.

Importantly, a part of the budget savings would come from the administration’s proposal to trim the value of itemized deductions for higher-income households. Individuals earning at least $200,000 and couples earning $250,000 could still take all their deductions, including the mortgage interest deduction, but the value of the deductions would be capped at 28% instead of 35%.

Another budget proposal that would cost home owners is a 25 basis-point increase in the annual mortgage insurance premium on FHA-backed loans, which the administration already has the authority to implement.

That hike will raise the premium to 1.15% from 0.9% of the loan amount, and is expected to generate $2 billion in funds for the agency. The increased funds will build the agency’s insurance fund, but is expected to also drive some borrowers out of the program.

HUD Secretary Shaun Donovan in a conference call on Wednesday said he expects lending volume on FHA loans to drop to $218 billion. “That is substantially below the volumes which we’ve done this past year,” he said.

The administration’s release of its budget proposal is just the first step in a multi-step process that in years’ past has taken much of the year to complete. Once the House and Senate Budget Committees put forward their resolutions for setting spending parameters (which might end up bearing little resemblance to what the administration has proposed), the appropriations committees will write the legislation to flesh out the actual spending bills, and the tax-writing committees will work on their side of the legislation.

The deadline for all this action is the end of the fiscal year, Sept. 30. But it’s not uncommon for Congress to let that deadline slip.

Source: NAR

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