The new mortgage charges you may have heard of are causing quite a stir.
So much so that Pennsylvania Treasury Secretary Stacy Garrity sent a letter to the FHFA and President Joe Biden today calling for their removal.
The letter is backed by 32 other fiscal officials from 26 other states, all of whom oppose the new mortgage pricing.
In short, they think it’s unfair for borrowers with a high FICO score to subsidize borrowers with a low FICO score by having to pay more than they used to.
It’s a big deal because the new pricing applies to mortgages backed by Fannie Mae and Freddie Mac, which account for about 60% of the residential mortgage market.
First some background on Fanny, Freddie and the FHFA
As noted, Fannie Mae and Freddie Mac backed the majority of mortgages that exist today. They are easily the most common type of mortgage available.
These loans are known as matching mortgages because they adhere to Fannie or Freddie’s underwriting guidelines.
It is overseen by the Federal Housing Finance Agency (FHFA), which only came into existence in 2008.
Since then, the couple have been in conservatorship (thanks to the massive housing crisis) and are essentially quasi-government entities.
One of the functions of the FHFA is to establish a single-family pricing framework for Fannie and Freddie-backed mortgages.
All matching mortgages, other than some lower-income options like HomeReady, are subject to loan-level rate adjustments, known as LLPAs.
These fees are charged for things like credit score, loan-to-value ratio, type of occupancy, type of property, and so on.
In short, FHFA applies risk-based pricing to the loans it purchases and securitizes.
These fees allow it to operate properly and serve its mission of promoting home ownership by, among other things, offering lower interest rates to American homebuyers.
At issue is the new pricing structure, which appears to penalize those with higher FICO scores while providing a discount for those with lower FICO scores..
The updated fee is already in effect as it applies to deliveries and acquisitions beginning May 1, 2023.
FHFA Director Thompson defends the new prices
Last week, FHFA Director Sandra L. Thompson issued a statement defending the changes, noting that the agency “is first and foremost a safety and health regulator.”
And that “the updated pricing framework will enhance the integrity and safety of companies, which will help them better achieve their mission.”
Its mission is to support affordable housing for all Americans and “provide reliable market liquidity,” including for borrowers with limited income or wealth.
Thompson added that their new pricing framework “aligns more closely with the expected financial performance and risk of the loans they’re making.”
It had not been updated for many years before the comprehensive review that began in 2021.
This led to “targeted fee increases” for loans on second homes and high-balance loans, and eventually cashing out refinances.
These types of loans are not geared toward the underprivileged, so the idea was to eliminate any unnecessary pricing incentives.
Nobody was excited about it, but it seemed like he was taking it in stride. The biggest problem now is that recent price changes affect virtually all homeowners.
Why opponents don’t like the new mortgage fee
Simply put, the new pricing matrix is charging some borrowers with high FICO scores more than they did before. And it charges some borrowers with a lower FICO score lower than it used to.
For example, an applicant with a 740 FICO and a 20% down payment used to get a 0.50% fee.
From now on, they are charged 0.875%. That’s a difference of 0.375%, or $1.875 on a $500,000 loan amount.
This could lead to higher closing costs or a slight increase in the mortgage rate, say 125% higher.
So 6.625% instead of 6.50% on a 30 year flat, or maybe more money due at closing.
Meanwhile, the borrower with a 660 FICO score had a 2.75% yield at the 20% cut.
Now, you’ll only be charged 1.875%, a discount of 0.875% compared to old prices.
This has led to much outrage and finger-pointing, the argument that irresponsible borrowers are getting a break, and even “charity,” while those with traditionally good credit are penalized.
But Thompson argued that people “wrongly assume that the previous pricing framework was perfectly calibrated to risk – even though it has been many years since that framework was comprehensively revised.”
“The new fees linked to a borrower’s credit score and down payment will now align better with the expected long-term financial performance of those mortgages than their risk,” it added.
In other words, borrowers with high FICO scores were probably underpaid, while borrowers with a middle FICO score were paying too much.
Whether that’s true or not, this appears to be the new pricing structure and everyone is going to have to live with it.
For the record, prices have actually improved for those with a 780+ FICO score. So if you want to avoid getting penalized, and actually save money, you’ll need excellent credit.
There is no incentive to have a lower credit score – the new rates only narrow the gap between high and low credit scores.
In other words, you’ll still pay more for a 640 FICO score than a 740, but not as much.
I doubt this letter will change anything, especially since they didn’t offer a clear alternative or solution, instead simply referring to the new policy as a “disaster”.
