How the US subsidizes riskier homebuyers — at the expense of those with better credit

A little-known change to federal regulations on mortgage fees will provide discounts to homebuyers with riskier credit backgrounds, allowing homebuyers with better credit to bear the bills. When forced, the Washington Post learned.

Fannie Mae and Freddie Mac enact fee changes known as loan-level price adjustments This affects mortgages from commercial banks across the country, from Wells Fargo to JPMorgan Chase, effectively adjusting the interest rates paid by the majority of homebuyers.

As a result, industry experts say: For most homebuyers, the monthly mortgage payment is higher. It was amazing for those who worked for years to build their credit. It just faced higher-than-expected costs as part of the US Federal Housing Administration’s drive to make housing affordable. Financial Services Agency.

It’s hard to explain to someone who says, “I’ve worked my whole life to get good credit, and I’ve invested a lot of money. Are you saying that’s a negative?” prize. It’s a difficult conversation,” the Arizona-based mortgage originator told the Post.

“This is unprecedented,” added David Stevens, former Federal Housing Administration Commissioner in the Obama administration. “My emails are full of mortgage companies and CEOs. [telling] I know they are incredibly shocked by this move. ”

This tweak could further complicate the arduous mortgage application process and put even more pressure on the core segment of mortgage buyers. The housing market is already in the midst of a major decline, the expert added. Average 30-year mortgage rates were hovering at 6.27% last week. That’s up from about 5% a year ago and more than double what he was two years ago. According to Freddie Mac data.

Under the new rules, high-credit buyers with scores above 680 to 780 will see their mortgage costs skyrocket, with applicants paying a 15% to 20% down payment seeing the highest fees.

“This is a blatant and substantial reduction in fees for our riskiest borrowers, and a clear increase in high-credit buyers. We just revealed to the world,” Stevens added. He is also the former CEO of the Mortgage Bankers Association.

LLPA is an upfront fee based on factors such as the borrower’s credit score and down payment amount. Fees are usually converted into percentage points that change the buyer’s mortgage interest rate.

Under the revised LLPA pricing structure, homebuyers with a FICO credit score of 740 and a 15% to 20% down payment will be charged a surcharge of 1%. This is a 0.750% increase over the previous fee of just 0.250%.

Absorbed by long-term mortgage rates, the increase equates to less than a quarter percent of mortgage rates. According to Stevens’ calculations, on his $400,000 loan with his 6% mortgage rate, that buyer can expect about $40 more in monthly payments.

On the other hand, buyers with a credit score of 679 or lower will receive reduced fees and favorable mortgage rates. For example, a buyer with a down payment of 5% or less and a FICO credit score of 620 will receive a 1.75% commission discount. This is down from his previous commission rate of 3.50% for that bracket.

Absorbed in long-term mortgage rates, that equates to a discount of 0.4% to 0.5%.

The FHFA-ordered overhaul of the LLPA affects purchase loans, limited cash-out refinancings, and cash-out refinancing loans.

The revamped price list also includes the controversial addition of new fees for buyers with debt-to-income ratios above 40%. This complex measure was quickly met with pushback from the Home Loan Bankers Association and other industry groups, who warned it would be difficult to implement. .

After a backlash, the FHFA announced last month that it would delay the introduction of the debt-to-income fee until at least August 1. “

The LLPA fee changes are scheduled to go into effect on May 1st.

Changes to the fee structure will make it more affordable for what the FHFA calls “mission borrowers,” defined as first-time buyers, low-income borrowers, and applicants from underserved communities. It’s the latest in several moves by the FHFA aimed at increasing

Last year, the FHFA eliminated upfront fees for first-time buyers below 100% of median income in a region, or 120% in regions identified as “high cost.” Agencies have also increased upfront rates for second homes and some large mortgages.

“The timing of this is troubling,” Pete Mills, MBA’s senior vice president of housing policy, told the Post. The timing is not ideal.”

According to Mills, “most borrowers” are likely to see slightly higher prices as a result of the fee change.

FHFA officials were asked about concerns that the change would hurt high-credit buyers, and the agency said: [Fannie and Freddie] He added that changes in long-term mortgage rates are by far the biggest determinant of financial conditions in the U.S. housing market.

“The latest realignment of the pricing framework announced by the FHFA in January 2023 is minimal by comparison and maintains market stability,” an FHFA official said in a statement.

Fanny and Freddy is a government-backed agency that buys loans from mortgage lenders and either holds them as assets or resells them as mortgage-backed securities. Both have been under federal control since the Great Recession destroyed the housing market.

Both companies are bound by their respective charters to improve access to affordable mortgages. They do this in part using a “cross-subsidization” model. In this model, some borrowers will be charged slightly more for their loans, while others will be charged less.

Overall, buyers with lower credit will pay more in LLPA fees than buyers with higher credit, but the latest changes are closing the gap.

According to officials, the LLPA changes would increase average prices by just 3 to 4 basis points (0.03% to 0.04%) across various mortgage recipients, equivalent to a few dollars a month.

The agency claims the LLPA changes will help Fanny and Freddie maintain their financial health. This is an important element of guardianship responsibility.

FHFA Director Sandra Thompson said in a statement earlier this year, “These upfront fee changes will enhance the safety and health of our enterprise by enhancing our ability to improve our capital position over time. To do.