A relatively simple bureaucratic change proposed by the Federal Housing Finance Agency has sparked a viral storm in the right-leaning news media recently, with outlets such as Washington TimesAnd New York PostAnd National Review and Fox News all reported some variants of the sentiments expressed in times Headline: “Biden Raises Payments for Homebuyers with Good Credit to Subsidize Subprime Mortgages.”
The core issue relates to the recent decision by the FHFA – acting as custodian of government-sponsored enterprises (GSEs) – to review the loan-level price adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac, which together account for nearly 60% of the US population. Mortgage loans. The LLPAs imposed by GSEs are primarily determined by the type of loan, the loan-to-value ratio, and the credit score of the borrower.
What is broadly true in coverage is that the changes — which were first announced in January, affect loans made to GEFs on or after May 1, and have therefore already been implemented by lenders for several months — tend to balance out costs. to those companies. With lower credit scores and increased costs for those with higher credit scores. In fact, as part of a broader repricing change announced last year, the FHA eliminated fees for traditional loans for about 20% of homebuyers, which are funded by increased advance fees for second homes, high-balance loans, and cash refinancings.
Unfortunately, the way this story was spun in the wake of the changes would have left many news consumers with the impression that borrowers with higher credit scores would pay more direct fees than borrowers with lower credit scores. This is definitely not the case. Comparing apples to apples, at each level of the network, a borrower with a higher credit score will still have fewer LLPAs (or, in many LTV categories, none).
Mercatus Writing Center’s Kevin Erdmann responded in his Substack newsletter to a Fox News graphic announcing that, under the new rules, “620 FICO gets a fee discount of 1.75%” while “740 FICO pays a fee of 1%”:
I’m pretty sure what they did here was select the lower credit score that saw the biggest drop in fees. Then, they report the total fee for a higher credit score. Therefore, a low 620-degree down payment has fees ranging from about 6.75% to 5% (when mortgage insurance is included). Also, the 740 degree fee increased from 0.25% to 1%. (plus 0.25% mortgage insurance fee). Why didn’t they just say that 740° fees were up 0.75%? You will still express their partisan view. It would still be weird, though, because it would describe mortgages with two different down payments. This will mask the fact that the Score 620 is still subject to 3% higher fees than the Score 740. But, at least, the levels won’t be mixed with changes.
Ultimately, whether these particular changes are good or bad for GSEs is an actuarial question. As Erdmann notes, there are good reasons to believe that fees on low-credit borrowers have been too high for a long time.
But there are other reasons to worry about what the accident might mean for the insurance markets. Here, the concern is that state regulators — or in the worst-case scenario, Congress — might think charging those with high credit scores to subsidize those with low credit scores might actually be an idea worth emulating.
It is clear that insurers’ use of credit information in underwriting and pricing has been the subject of public debate for four decades. At this point, while a handful of states ban the practice outright, most have adopted legislation allowing it, with some caveats.
The FHFA precedent—allowed because Fannie and Freddie have been in custody of the agency for nearly 15 years—is particularly troubling given recent instances of state insurance regulators moving to limit or ban the use of credit information without any explicit direction from state legislators to do so. So. Which courts choose to unilaterally support such decisions depends on the specifics of state law.
Last year, Washington State Insurance Commissioner Mike Cridler moved to adopt a permanent rule enacting a three-year ban on using credit-based insurance results, after it was declared invalid in September 2021 by Thurston County Chief District Court Judge Endo Thomas. A final order issued in August 2022 from Thomas found that Kreidler had exceeded his authority to adopt the rule when there was specific state law allowing insurance companies to use credit rating.
Most recently, the Nevada Supreme Court ruled in February to uphold a temporary ban on the use of credit information in determining insurance rates originally issued by the Nevada Division of Insurance in December 2020. The rule, which is set to expire May 20, 2024, was challenged without notice. Feasibility by the National Association of Mutual Insurers.
The rise of credit-based insurance scores revolutionized the industry, allowing for considerably greater segmentation and better matching of risk to rate. Where state auto insurance entities insured up to half or more of all passenger auto risks, they now account for less than 1% of the market nationwide. It would be unfortunate that some misleading headlines inspired ill-considered regulations to reverse this progress.
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