How the US is subsidizing high-risk homebuyers — at the cost of those with good credit

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Through Thomas Barrabi

April 16, 2023 | 4:23 p.m

A little-noticed change to federal rules on mortgage rates will offer discounted rates for homebuyers with riskier credit backgrounds — and force out better-credit buyers of the house to pay the bill, The Post has learned.

Fannie Mae and Freddie Mac will implement fee changes known as loan-level price adjustments (LLPAs) on May 1 that will affect mortgages originating from private banks nationwide, from Wells Fargo to JPMorgan Chase, effectively changing the interest rates most homebuyers pay.

The result, according to industry pros: more expensive monthly mortgage payments for most homebuyers — a nasty surprise for people who have worked for years to build their credit, only to face more higher costs than they expected as part of the US Federal Housing Finance Agency’s housing affordability push.

“It’s going to be a challenge trying to explain to someone who says, ‘I’ve worked my whole life for high credit and I’ve put a lot of money in and you’re telling me that’s negative now?’ That’s a tough conversation,” a concerned Arizona-based mortgage loan originator told The Post.

“This is unprecedented,” added David Stevens, who served as Federal Housing Administration commissioner during the Obama administration. “My email is full from mortgage companies and CEOs [telling] to me how shocked they are at this step.”

The fixes could further complicate the laborious mortgage application process and add more pressure to a key segment of buyers in a housing market already in the midst of a major downturn, experts added. . The average 30-year mortgage rate was climbing to 6.27% last week — up from about 5% a year ago and more than twice as high as last week, according to Freddie Mac data.

Under the new rules, high-credit buyers with scores from 680 to 780 will see their mortgage costs rise – with applicants putting down a 15% to 20% down payment experiencing the largest increase in fees.

“This is a clear and significant reduction in fees for their highest risk borrowers and a clear increase in better credit quality consumers – which just makes it clear to the world that this step is a relatively significant change in cross-subsidy pricing,” added Stevens, who is also the former CEO of the Mortgage Bankers Association.

LLPAs are down payments based on factors such as the borrower’s credit score and the size of their down payment. Fees are usually converted into percentage points that change the buyer’s mortgage rate.

Under the LLPA’s revised pricing structure, a homebuyer with a 740 FICO credit score and a 15% to 20% down payment will face a 1% surcharge – an increase of 0.750% over the previous payment of Only 0.250%.

When taken on a long-term mortgage rate, the increase equates to slightly less than a quarter percentage point in the mortgage rate. On a $400,000 loan with a 6% mortgage rate, that buyer could expect their monthly payment to increase by about $40, according to Stevens’ calculations.

Meanwhile, buyers with credit scores of 679 or lower will have their payments reduced, resulting in more favorable mortgage rates. For example, a buyer with a 620 FICO credit score with a down payment of 5% or less gets a 1.75% down payment – a decrease from the previous down payment rate of 3.50% for that bracket.

When factored into the long-term mortgage rate, that equates to a 0.4% to 0.5% discount.

The FHFA-ordered overhaul of LLPAs affects purchase loans, limited cash-out refinances and cash-out refinance loans.

The revised pricing matrix also included the controversial addition of a new charge for buyers with debt-to-income ratios above 40% — a convoluted measure that drew immediate pushback from the Mortgage Bankers Association and other industry groups who warned that it would be difficult to implement. .

After pushback, the FHFA announced last month that it would delay the rollout of the debt-to-income fee until at least Aug. 1 — a move it said would “ensure a level playing field for all lenders to have enough time to deploy the charge .”

The LLPA bill changes are still set to take effect on May 1.

The fee structure changes are the latest in several FHFA moves aimed at boosting affordability for what the agency calls “mission borrowers” — defined as first-time buyers, low-income borrowers and applicants from underserved communities.

Last year, FHFA waived down payments for first-time buyers at or below 100% of their area’s median income, or 120% in areas identified as “high value.” The agency also raised upfront fees on second homes and some larger mortgage loans.

“The timing of this is troubling,” Pete Mills, senior vice president of residential policy at MBA, told The Post. “As we begin to reach the spring home buying season, home purchases will be visibly impacted by rate increases over the past year. The timing was not perfect.”

“Most borrowers” are likely to see modest price increases as a result of the fee changes, according to Mills.

Asked about concerns that the changes would hurt consumers with high credit, an FHFA official told The Post that the agency is “tasked with ensuring [Fannie and Freddie] play their role in any market conditions,” adding that changes in long-term mortgage rates are a bigger factor in determining financial conditions in the US housing market.

“The most recent recalibration to the pricing framework announced by FHFA in January 2023 is minimal, by comparison, and maintains market stability,” FHFA officials said in a statement.

Fannie and Freddie are government-backed entities that buy loans from mortgage lenders and either hold them as assets or resell them as mortgage-backed securities. Both have been in federal conservatorship since the housing boom during the Great Recession.

The two companies are bound by their charters to help improve access to affordable mortgage loans. They do this in part by using a “cross-subsidization” model, where some borrowers are charged less for loans while others are charged less.

In general, buyers with poor credit will still pay more in LLPA fees than buyers with high credit – but the latest changes will close the gap.

The official said the changes to the LLPA would result in an average price increase of just three to four basis points, or 0.03% to 0.04%, across the spectrum of mortgage recipients – the equivalent of several dollars per month.

The agency insists the LLPA changes will help preserve the financial health of Fannie and Freddie — a key element of its responsibility as conservator.

“These changes to upfront fees will strengthen the safety and stability of Enterprises by enhancing their ability to improve their capital position over time,” FHFA Director Sandra Thompson said in a statement earlier this year. this.