The Impact of Limiting Sellers Concessions to Closing Costs

Alastair McFarlane, U.S. Department of Housing and Urban Development

Impact

A regulatory impact analysis must accompany every economically significant federal rule or regulation. The Office of Policy Development and Research performs this analysis for all U.S. Department of Housing and Urban Development rules. An impact analysis is a forecast of the annual benefits and costs accruing to all parties, including the taxpayers, from a given regulation. Modeling these benefits and costs involves use of past research findings, application of economic principles, empirical investigation, and professional judgment.

The views expressed in this article are those of the author and do not represent the official positions or policies of the Office of Policy Development and Research or the U.S. Department of Housing and Urban Development.

The National Housing Act requires the U.S. Department of Housing and Urban Development (HUD) to adjust program standards and practices to operate the Mutual Mortgage Insurance Fund (MMIF) on a self-sustaining basis. In a recent revised notice, “Federal Housing Administration Risk Management Initiatives: Revised Seller Concessions” (HUD, Office of the Assistant Secretary for Housing, 2012), the Federal Housing Administration (FHA) placed a ceiling on the closing cost concessions that sellers can make to borrowers. The set of actions outlined in the revised notice will reduce the FHA’s net losses resulting from high rates of insurance claims. The total gain to FHA is expected to range from $60 to $70 million annually. The additional social benefits from preventing foreclosures, which are positively associated with seller concessions, are estimated at $25 million. The combined compliance cost for homebuyers and sellers could range from $21 to $97 million and depends a great deal on the rate of capitalization of concessions into sales prices.