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Background: This is a follow up from this question, regarding Obama's lowering of the mortgage insurance rates 11 days before Trump was inaugurated (not to go into effect until week after Trump became president), which was rejected by Trump within hours of his being sworn in. It is my understanding that Obama's lowering of the rate was a political move to try and damage Trump, and that the reduction makes no logical sense. That Trump's rejection of the reduction is arguably the right thing to do.

Specifically, I want to make sure that I have the following correct. I have never had a mortgage, and have no financial background.

When the Federal Reserve raises its interest rates, that means that they are trying to discourage lending by making loans more expensive. It was only raised a half of a point in 2016 (hovering at near zero for almost 8 years since the housing crisis), which is perhaps more of a symbolic move, but still, it discourages potential new borrowers.

This in turn makes new fixed rate mortgages more expensive (I'm not talking insurance here, I mean the mortgage itself), and existing variable rate mortgages more expensive. So people are more wary of taking out new mortgages of any kind, and people with variable rate mortgages now have higher payments.

This means that the FHA may have some more revenue coming in from existing mortgages, but (I'm guessing) lower overall income, because the rate of new mortgages being created decreases. And more importantly, defaults are likely to increase, meaning both less income, and that their solvency is put at risk (as it was in 2013 when they needed a bailout).

All of this implies that the FHA rates for mortgage insurance should go up, not down. Both to protect their solvency with more income, and to discourage (less wealthy or responsible?) people from taking out new mortgages.

I would appreciate any corrections or insight. Thanks.

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  • $\begingroup$ My opinion: If a tiny increase in the Fed Funds rate from historically low levels leads to a meaningful increase in the mortgage default rate God help us all. Surely the economy is not that fragile. Mortgage defaults increase with high mortgage rates (not so much the FF rate) and with recessions (it is when you lose your job that you can't play your mortgage). I don't see a recession on the horizon do you? $\endgroup$ – Alex C Jan 27 '17 at 0:41
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    $\begingroup$ There are many reasons why the Fed would raise rates, and I don't think they're doing it for "discouraging lending". It mostly has to do with inflation, unemployment, and the general state of the economy. The fact that Obama lowered the insurance rates at the time he did is definitely political. $\endgroup$ – d--b Jan 27 '17 at 10:14

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