Recent pricing changes for federally backed mortgages have drawn controversy, leading to allegations that borrowers with better credit may pay higher fees to support those with worse credit.
The Federal Housing Finance Agency modified its upfront costs for mortgages from Fannie Mae and Freddie Mac with a new rule, which would result in higher mortgage fees for some borrowers and reduced prices for others.
Sandra Thompson, director of the FHFA, responded to criticism of the modifications by claiming that some evaluations were flawed due to misunderstandings of the changes.
“Updated fees vary in price, with some going up and some going down. In a statement, Thompson stated that they do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers.
Many borrowers with excellent credit or substantial down payments will notice a decrease in or no change in their fees, she continued.
However, opponents of the most recent modifications contend that these fees will penalize responsible borrowers while encouraging others to behave irresponsibly in the face of escalating affordability problems.
In a recent open letter to the White House, financial officers from 27 states urged President Biden to revoke the new regulation because it would make it much more expensive for borrowers with good credit to buy a home.
According to the letter, “the policy will, in other words, take money away from the people who played by the rules and did things right – including millions of hardworking, middle-class Americans who built a good credit score and saved enough to make a strong down payment.”
Dissecting the latest charges
According to Freddie Mac data, the upfront costs on a standard $400,000 30-year loan could total $42 per month for borrowers with credit scores above 780.
According to a Mortgage Bankers Association estimate, costs for some borrowers with higher credit scores and down payments may rise by 5 to 25 basis points.
Higher credit scores will still result in reduced payments, according to experts, and the new price changes do not penalize borrowers with strong credit.
“Good credit borrowers are not being offered higher rates than lower credit borrowers. FHFA’s new pricing just means that they are not getting as big of a break on their rate as before,” MBA said.
Instead, borrowers with better credit may not receive as much of a break as they once did, while riskier borrowers with worse credit and lower down payments may experience a smaller hit.
“Policymakers explained the change as an effort to level the playing field and improve access to housing for first-time buyers and minorities,” Zillow senior economist Orphe Divounguy told the media.
“With this change, the spread of fees between high and low credit score borrowers isn’t as wide. This is not as big of a change as some are making this out to be,” he added.
Some criticism has also been leveled at down payments, claiming that the FHFA is undercharging people with riskier loans by charging greater fees to applicants who have better credit.
However, the Urban Institute’s analysis points out that this argument ignores the mortgage insurance that borrowers are required to purchase on loans where a down payment falls short of 20%.
How will the new costs be noticed by homebuyers?
The market environment has been particularly challenging for potential purchasers with weak credit histories.
Due to a statewide shortage and fluctuating mortgage rates, housing affordability has suffered significantly in recent years.The Federal Reserve attempted to reduce inflation by boosting interest rates in the second half of the year, which caused interest rates to swing significantly.
However, given the way higher and lower credit scores are grouped, there has always been some cross-subsidization, Redfin Chief Economist Daryl Fairweather told The Hill.
“If you’re in the 700 to 800 range, you’ll get the same mortgage rate, whether you’re at 700, or you’re at 800. So, in that scenario, the 800’s are cross subsidizing 700’s. It’s just that they change the formula,” Fairweather said.
MBA stated that the new structure has been in place since March, taking into account the time it takes to close a mortgage.
Fairweather also mentioned that the absence of an announcement may have made the shift go unreported due to market conditions.
“[N]o one’s going to notice it because there’s so much mortgage rate volatility right now, anyway. You wouldn’t even know if there wasn’t this announcement, she continued. “I think the big announcement was made to make it seem like it’s a big deal — that they’re doing this redistribution. But in effect, I don’t think anyone’s going to notice.”