American home buyers who have good credit scores will be penalized in an effort by the Biden administration to achieve equity. The higher fees for those with good credit will be redistributed to home buyers with poor credit.
As part of the U.S. Federal Housing Finance Agency’s push for more affordable housing, home buyers with good credit scores will be forced to pay additional fees on their mortgages. Starting on May 1, the federally backed mortgage companies Fannie Mae and Freddie Mac will establish new loan-level price adjustments with private banks nationwide. Those additional fees will be used to subsidize home buyers with risky credit scores.
The Federal Deposit Insurance Corporation defines loan-level price adjustments as "risk-based pricing adjustments that vary based on credit score, loan-to-value ratio, type of product, and various other factors, charged at the time of origination."
The Washington Times reported, "Mortgage industry specialists say homebuyers with credit scores of 680 or higher will pay, for example, about $40 per month more on a home loan of $400,000. Homebuyers who make down payments of 15% to 20% will get socked with the largest fees."
According to the New York Post, "Meanwhile, buyers with credit scores of 679 or lower will have their fees slashed, 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 decrease from the old fee rate of 3.50% for that bracket."
Ian Wright – a senior loan officer at Bay Equity Home Loans in the San Francisco area – told the Washington Times, "The changes do not make sense. Penalizing borrowers with larger down payments and credit scores will not go over well. It overcomplicates things for consumers during a process that can already feel overwhelming with the amount of paperwork, jargon, etc. Confusing the borrower is never a good thing."
David Stevens – a former head of the Mortgage Bankers Association who served as commissioner of the Federal Housing Administration during the Obama administration – declared the new rule to be "unprecedented."
"This was a blatant and significant cut of fees for their highest-risk borrowers and a clear increase in much better credit quality buyers – which just clarified to the world that this move was a pretty significant cross-subsidy pricing change," Stevens told the New York Post.
Stevens wrote on social media, "This confusing approach won’t work and more importantly couldn’t come at a worse time for an industry struggling to get back on its feet after these past 12 months. To do this at the onset of the spring market is almost offensive to the market, consumers, and lenders."
Federal Housing Finance Agency Director Sandra Thompson – who was appointed by President Joe Biden – defended the rule changes by stating they would "increase pricing support for purchase borrowers limited by income or by wealth." She said the fee changes are "minimal" and are "to ensure a level playing field for all lenders to have sufficient time to deploy the fee." Thompson added that the fees would provide market stability.
Bob Broeksmit – the president of the Mortgage Bankers Association – fired off a letter to Thompson in February decrying the new rule as "especially troubling." He noted that the debt-to-income ratio fee creates "operational issues and quality control" for lenders.
The new rules arrive as the housing market struggles after the average 30-year fixed mortgage rate spiked to more than 7% in March following multiple interest rate increases by the Federal Reserve. In January 2021, mortgage rates in the U.S. set a record low – 2.65% for a 30-year, fixed loan.
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