How the US is subsidizing high-risk homebuyers – at the expense of those with good credit

A miniscule reform of federal rules on mortgage fees would offer discounted rates to home buyers with risky credit backgrounds — and force high-credit homebuyers to foot the bill, The Post has learned.

Fannie Mae and Freddie Mac will change fees Known as loan-level value adjustment (LLPAs) on May 1 that will affect mortgages originating at private banks across the country from Wells Fargo to JPMorgan Chase, effectively reforming the interest rates paid by the vast majority of homebuyers.

The result, according to industry professionals: costlier monthly mortgage payments for most home buyers — an ugly surprise for those who worked for years to build their credit, only to face higher costs, as They were expected as part of a housing affordability push by the US Federal Housing Administration. Finance Agency.

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

“It’s unprecedented,” said David Stevens, who served as Federal Housing Administration commissioner during the Obama administration. “My email is full of mortgage companies and CEOs [telling] I am incredibly shocked by this move.”

Tweaks could further complicate onerous mortgage application process and put more pressure on a core segment of buyers The housing market is already going through a severe downturn, the experts said. The average 30-year mortgage rate hovered at 6.27% as of last week – up from about 5% a year ago and more than double what it 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 rise – with applicants who make 15% to 20% down payments experiencing the biggest increases in fees.

“This was a clear and significant cut in fees for their highest risk borrowers and a clear increase in buyers with better credit quality – which made it clear to the world that this move was a very significant cross-subsidy pricing change,” Stevens said, who is also the former CEO of the Mortgage Bankers Association.

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The changes in LLPA fee will be effective from May 1.

There are upfront charges based on factors such as the credit score of the LLPA borrower and the size of their down payment. The fees are typically converted into percentage points that replace the buyer’s mortgage rate.

Under the revised LLPA pricing structure, a home buyer with a 740 FICO credit score and a 15% to 20% down payment will face a 1% surcharge — an increase of 0.750% compared to the old fee of just 0.250%.

When factored into a longer-term mortgage rate, the increase equates to a little less than a quarter percentage point in the mortgage rate. According to Stevens’ calculations, on a $400,000 loan with a 6% mortgage rate, that buyer can expect their monthly payments to increase by about $40.

Meanwhile, buyers with credit scores of 679 or lower will see lower fees, 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% fee discount – a reduction from the old fee rate of 3.50% for that bracket.

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Experts say the change in duty will hurt buyers with high debt.
Christopher Sadowski

When factored into the long-term mortgage rate, this 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 fee for buyers with debt-to-income ratios above 40% — a complex 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 loan-to-income fee until at least August 1 — a move it said would “ensure a level playing field for all lenders so that the fee can be reduced.” enough time to deploy.

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

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Mortgage rates have more than doubled in the last two years.
Bloomberg via Getty Images

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

Last year, the FHFA eliminated the upfront fee for first-time buyers who make 100% or less of their area’s median income, or 120% in areas that are identified as “high cost.” The agency also raised advance fees on second homes and some large mortgage loans.

“The timing of this is troubling,” Pete Mills, senior vice president of housing policy at MBA, told the Post. “As we begin to hit the spring home buying season, the home purchase rate is clearly taking a hit compared to last year. The timing of this is not ideal.

According to Mills, “most borrowers” are likely to see a modest price increase as a result of the fee change.

Asked about concerns that the changes would harm high-credit buyers, an FHFA official told the Post that the agency was “tasked with making sure [Fannie and Freddie] fulfill their role in any given market condition,” adding that changes in long-term mortgage rates are a large factor in determining finance conditions in the US housing market.

“The latest readjustment to the pricing structure announced by the FHFA in January 2023 is the minimum, and preserves market stability,” an FHFA official said in a statement.

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The US housing market is going through a recession.

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 under federal guardianship since the housing market exploded during the Great Recession.

Both firms are bound by their charters to help improve access to affordable mortgage loans. They do this using a “cross-subsidisation” model, in which some borrowers are charged slightly more for the loan while others are charged less.

Overall, low-credit buyers will still pay more in LLPA fees than high-credit buyers – but the latest changes will close the gap.

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

The agency claims that the LLPA changes will help maintain financial health at Fannie and Freddie — a key element of their responsibility as custodians.

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

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