Mortgages for Homebuyers With Good Credit Could Cost More Starting May 1, But FHFA Refutes This Suggestion
Americans who have worked hard to build up their credit scores might be alarmed over warnings that a new federal rule could reward those with lower credit at the expense of those with higher credit. However, a recent letter from FHFA director Sandra L. Thompson casts doubt on these allegations, complicating matters.
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Under the rule, homebuyers with a credit score of 680 or higher will reportedly have to pay about $40 per month more than people with worse credit when taking out a home loan of $400,000, according to NewsNation, which cited a report from The Washington Times.
The rule goes into effect on May 1, 2023 — just ahead of the peak spring buying season. It could impact mortgages from private banks across the nation based on loan-level price adjustments (LLPAs) established by Fannie Mae and Freddie Mac.
High-credit consumers with scores ranging from 680 to above 780 will see a spike in mortgage costs, The New York Post reported, with the biggest increases being felt by those who put 15% to 20% down on a home.
According to media reports, the new LLPAs essentially amount to fees imposed on borrowers with high credit scores as a way of subsidizing those with low credit scores. The goal is to support federal initiatives to increase affordable housing across the country.
The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, has long sought to give consumers more affordable housing options, Fox News reported. The fear among some housing experts is that the new rules will make an already challenging market even more challenging for homebuyers.
“This confusing approach won’t work and more importantly couldn’t come at a worse time for an industry struggling to get back on its feet after these past 12 months,” David Stevens, a former commissioner of the Federal Housing Administration during the Obama administration, wrote in a social media post. “To do this at the onset of the spring market is almost offensive to the market, consumers, and lenders.”
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FHFA Refutes Allegations That High-Risk Buyers Will Benefit From New Rules
Stating that “much of what has been reported advances a fundamental misunderstanding about the fees charged by the Enterprises [Fannie Mae and Freddie Mac], and why they were updated,” Thompson sought to add some clarification over the rule changes, offering the following points in her April 25 letter.
Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less. The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.
Some updated fees are higher and some are lower, in differing amounts. They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.
Some mistakenly assume that the prior pricing framework was somehow perfectly calibrated to risk — despite many years passing since that framework was reviewed comprehensively. The fees associated with a borrower’s credit score and down payment will now be better aligned with the expected long-term financial performance of those mortgages relative to their risks.
The new framework does not provide incentives for a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20 percent of the home’s value typically pay mortgage insurance premiums, so these must be added to the fees charged by the Enterprises when considering a borrower’s total costs.
The targeted eliminations of upfront fees for borrowers with lower incomes — not lower credit scores — primarily are supported by the higher fees on products such as second homes and cash-out refinances. The Enterprises’ statutory charters specifically include references to supporting low- and moderate-income families by earning returns on mortgages for these borrowers that may be less than the returns earned on other products. Indeed, Congress incorporated this into the Enterprises’ charters decades ago and it is a long-standing component of the Enterprises’ core business models.
The changes to the pricing framework were not designed to stimulate mortgage demand. We publicly announced the objectives of the pricing review at its onset, and stimulating demand was never a goal of our work.
Home Prices Remain High Despite Elevated Mortgage Rates
Home prices in much of the country remain historically high even amid a sharp spike in mortgage rates over the past year. Meanwhile, many regions continue to suffer from low inventory — especially for entry-level buyers.
A recent analysis from Zillow found that entry-level buyers are dealing with faster-rising prices and more competition than other house hunters. Recent data indicates that year-over-year prices rose by 8% for the least-expensive one-third of houses, while the most-expensive homes lost value for the first time in more than a decade.
“Buyers shopping for the least-expensive homes this spring aren’t noticing much difference from the pandemic-era market heat,” Zillow chief economist Skylar Olsen said in a press release. “Competition is fierce, but there aren’t many homes for sale, so buyers should be patient but prepared to move quickly and anticipate a bidding war once they find a home they love.”
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