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You’ve probably heard about those new mortgage fees that are causing quite a stir.
So much so that Stacey Garrity, the Treasurer of the State of Pennsylvania, has a Letter Today the FHFA and President Joe Biden are pleading for their end.
And the letter is supported by 32 other financial officials from 26 other states, all of whom oppose the new mortgage pricing.
In short, they believe it’s unfair that high-FICO score borrowers are essentially subsidizing low-FICO score borrowers to pay more.
That’s a big deal because the new price applies to mortgages backed by Fannie Mae and Freddie Mac, which account for about 60% of the residential mortgage market.
First some background on Fannie, Freddie and the FHFA
As mentioned, Fannie Mae and Freddie Mac back most of the mortgages that exist today. They are the most common type of home loan easily available.
Such loans are known as conforming mortgages because they follow Fannie or Freddie’s underwriting guidelines.
They are supervised by the Federal Housing Finance Agency (FHFA), which came into existence only in 2008.
Since then, the pair have been in guardianship (thanks in large part to the housing crisis) and are essentially quasi-governmental entities.
One of the functions of the FHFA is to establish a single-family pricing framework for mortgages backed by Fannie and Freddie.
All conforming mortgages, apart from a few low-income options like HomeReady, are subject to loan-level value adjustments, known as LLPAs.
These fees are charged for things like credit score, loan-to-value ratio, occupancy type, property type, and so on.
In essence, the FHFA applies risk-based pricing to the loans it purchases and securitizes.
These fees allow it to continue to operate well and fulfill its mission of promoting home ownership, while providing low interest rates to American home buyers, among other things.
The problem is the new pricing structure, which penalizes those with higher FICO scores while offering discounts to those with lower FICO scores.,
And the updated charges are essentially already effective as they apply to delivery and acquisition from May 1, 2023.
FHFA director Thompson defends new pricing
Last week, FHFA director Sandra L. Thompson issued a statement defended the changes, noting that the agency is “first and foremost a safety and soundness regulator.”
and that “the updated pricing framework will advance the security and soundness of enterprises, helping them better achieve their missions.”
That mission is to support affordable housing for all Americans and “provide reliable liquidity to the market,” including borrowers limited by income or wealth.
Thompson said their new pricing structure is “more accurately aligned with the expected financial performance and risks of the loans they back.”
And it hadn’t been updated in several years before a comprehensive review scheduled to begin in 2021.
This prompted “targeted fee increases” for loans on second homes and for high-balance loans, and eventually cash refinances.
These types of loans are not designed to receive low service, so the idea was to eliminate any unnecessary pricing incentives.
No one was thrilled about it, but it seemed to be taken lightly. The big problem now is that the latest pricing changes affect virtually all homeowners.
Why Opponents Don’t Like the New Mortgage Fees
Simply put, the new pricing matrix charges borrowers with some higher-FICO scores more. And charges lower fees than before for some low-FICO score borrowers.
For example, an applicant with a 740 FICO and 20% down payment would have been hit with a fee of 0.50%.
Going forward they are being charged 0.875%. That’s a difference of 0.375%, or $1,875, on a $500,000 loan amount.
This could result in higher closing costs or slightly higher mortgage rates, say. 125% higher.
So 6.625% instead of 6.50% on the 30-year fixed, or maybe more because of the money locked up.
Meanwhile, a 660 FICO score borrower putting 20% down was charged 2.75%.
Now, they will only be charged 1.875%, which is a discount of 0.875% relative to the old pricing.
This has led to much anger and finger-pointing, and the argument that irresponsible borrowers are getting a “handout” as well, while those with traditionally good credit are punished.
But Thompson argued that people “erroneously assume that the prior pricing framework was somehow perfectly calibrated for risk – despite many years having passed since that framework was comprehensively reviewed.” “
He added that the new “fees associated with a borrower’s credit score and down payment will now better align with the expected long-term financial performance of those mortgages relative to their risks.”
Put another way, it’s possible that high-FICO score borrowers are not being charged enough while mid-level FICO score borrowers are being charged too much.
True or not, looks like this is the new pricing structure and everyone will have to live with it.
For the record, pricing has actually improved for those with 780+ FICO scores. So if you want to avoid getting penalized, and really want to save money, you’re going to need excellent credit.
And there’s no incentive for a low credit score – the new price just narrows the gap between high and low credit scores.,
In other words, you’ll still pay more for a 640 FICO score than a 740 score, just not as much.
I doubt this letter will change anything, especially since he didn’t offer a clear alternative or solution, but only referred to the new policy as a “disaster”.
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