Bold Ginnie Mae, FHA reforms the Trump team should consider

Enjoy complimentary access to top ideas and insights — selected by our editors.

With new leadership at HUD, Ginnie Mae, and FHA, the next administration has a critical opportunity to reverse the misguided policies of the Biden administration and refocus on sustainable homeownership and wealth-building strategies. While the prior administration aimed to expand credit access, many of these efforts overlooked unintended consequences and, in several cases, worsened the very issues they sought to address.

One notable example is the Biden administration's attempt to increase homeownership by lowering FHA mortgage insurance premiums. From an Economics 101 perspective, this approach is fundamentally flawed, particularly in a housing market already grappling with a severe supply shortage. Reducing MIP effectively increases demand, but in a market short by millions of housing units, this only results in higher home prices and as we have shown before, very few new first-time homebuyers.

The Biden administration also sought to prevent foreclosures by expanding loss-mitigation options, including loan modifications, partial claims, FHA's Payment Supplement Partial Claim, which reduced payments by up to 25% for a period of three years, and the VA's Servicing Purchase initiative, which allows the VA to purchase loans in default from servicers, providing borrowers with additional flexibility to avoid foreclosure through a fixed 2.5% interest rate.

While the goal of these programs was to stabilize struggling borrowers and eventually widen the credit box, they also introduced significant moral hazards that far outweighed the benefits of foreclosure avoidance. For instance, payment reductions — despite deferred amounts being added to the end of the loan — create substantial monthly savings that borrowers may not genuinely need but might find difficult to pass up. Worse, some borrowers could strategically default on their loans to qualify for these benefits, even if they have the means to make their payments. This mirrors the flaws of other government-guaranteed programs, such as student loans, which often lead to poor outcomes for both taxpayers and individuals.

Ironically, the root problem of borrowers falling behind on mortgage payments is largely of the government's own making. FHA underwriting allows excessive debt-to-income ratios of up to 57% and nearly 80% of FHA first-time homebuyers have less than one month's worth of savings. This precarious situation leaves borrowers unprepared for even minor financial setbacks, let alone major disruptions.

Thus, the policies implemented by Team Biden risk repeating the same mistakes that have failed to increase the homeownership rate or narrow the persistent homeownership and wealth gaps, which remain as wide today as they were at the time of the 1968 Housing Act.

Team Trump should take a different approach by reversing these ineffective policies and pursuing reforms that prioritizes financial health for borrowers and helps them build wealth through sustainable homeownership. This strategy should rest on three pillars:

First, HUD should require higher reserves at loan origination to ensure borrowers are better prepared to handle financial emergencies. By prioritizing financial stability, this approach would empower borrowers to weather unexpected expenses without the need for taxpayer-funded bailouts.

Second, HUD should pivot away from the traditional 30-year mortgage, which often fails low-income, first-time buyers due to its slow principal paydown. Instead, HUD should promote 20-year mortgage terms with adjusted mortgage insurance premium pricing to align monthly payments with those of 30-year loans. This shift would enable borrowers to build equity more rapidly, reduce default risk, and foster long-term financial security. For example, a borrower with a $250,000, 20-year loan would pay down $21,000 more in principal within five years compared to a 30-year mortgage borrower. After 20 years, they would own their home outright, creating intergenerational wealth and freeing up cash flow for retirement or education. 

Third, Ginnie Mae should halt cash-out refinances, which often entice borrowers to extract equity from their homes to finance for example credit card debts. This practice is especially detrimental to borrowers with low existing mortgage rates who refinance into much higher rates as the higher rates applies to the entire loan balance over the entire time of the loan. For instance, research shows that a typical FHA or VA borrower who completed a cash-out refinance in late 2022 would have paid $38,000 less in total interest and accumulated $42,000 more in home equity with a 10-year home equity loan instead. 

Without Ginnie Mae's involvement in this sector, the private market would likely expand its offerings of home equity loans and HELOCs, providing borrowers with a more efficient way to access their home equity. These loans enable borrowers to maintain their original low mortgage rate while applying the higher interest rate only to the additional cash withdrawn. This structure not only saves borrowers thousands of dollars in interest and closing costs but also helps preserve their home equity, all while offering the cash they need.

Government programs and guarantees often fail when they neglect to address underlying structural flaws. HUD must prioritize empowering borrowers to build wealth and maintain homeownership through sustainable practices such as promoting 20-year loans and implementing prudent underwriting standards that protect borrowers from undue financial risk. By moving away from the failed housing policies that have burdened taxpayers and harmed many borrowers, the Trump administration has an opportunity to lay the foundation for meaningful housing reform and create greater economic opportunities for millions of Americans.