Obama to reduce FHA mortgage premium rate to spur buying

WASHINGTON -- First-time homebuyers who obtain government-backed loans would benefit from an Obama administration move to lower mortgage insurance premiums.

Under the plan, the Federal Housing Administration will reduce its annual mortgage insurance premiums by 0.5 percentage points, to 0.85 percent. The White House said Wednesday the reduction means new homebuyers would pay $900 less a year than they would without the change.

The rate drop announcement will be a centerpiece of President Barack Obama's trip to Phoenix today. Obama is making stops in Michigan, Arizona and Tennessee this week, drawing attention to the themes he intends to highlight in his State of the Union address Jan. 20.

The lower insurance fees would have a modest effect on sales, with the administration forecasting an increase of as much as 250,000 over the next three years. That pales in size to the broader market, representing an increase of less than 2 percent a year in projected sales.

Homeowners who refinance into an FHA mortgage would also benefit from the change. The White House estimated more than 800,000 homeowners could save on their monthly mortgage payments.

Even with the reduction, the new 0.85 percent premium is higher than historic norms. The rate was initially increased to raise FHA capital reserves, which took a hit during the housing crisis.

Home sales went through a slowdown in 2014, as rising home values pushed many would-be buyers to the sidelines. Wage growth has failed to match the sharp increase in home prices since the market bottomed out in 2012, leaving many Americans without the incomes or down payment savings to buy a home.

Sales of existing homes are projected to total 4.94 million in 2014, down from 5.1 million in the previous year, according to the National Association of Realtors. Analysts say sales of 5.5 million are normal in a healthy market.

AP Economics Writer Josh Boak contributed to this report.