Those new mortgage fees you’ve probably heard about are causing quite a stir.
So much so that Pennsylvania State Treasurer Stacy Garrity sent a letter to the FHFA and President Joe Biden today pleading for their elimination.
And the letter is backed by another 32 fiscal officers from 26 other states, all of whom oppose the new mortgage pricing.
In a nutshell, they believe it’s unfair that high-FICO score borrowers are essentially subsidizing low-FICO score borrowers 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 Fannie, Freddie, and the FHFA
As noted, Fannie Mae and Freddie Mac back the majority of mortgages that exist today. They are easily the most common type of home loan available.
Such loans are known as conforming mortgages because they adhere to the underwriting guidelines of Fannie or Freddie.
They are overseen by the Federal Housing Finance Agency (FHFA), which only came into existence in 2008.
Since then, the pair have been in conservatorship (thanks to the massive housing crisis) and are essentially quasi-government entities.
One of the FHFA’s jobs is to set a single-family pricing framework for mortgages backed by Fannie and Freddie.
All conforming mortgages, other than some low-income options like HomeReady, are subject to loan-level price 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 short, the FHFA applies risk-based pricing to the loans it purchases and securitizes.
These fees allow it to operate soundly and serve its mission of promoting homeownership, by among other things, providing low interest rates to American home buyers.
At issue is the new pricing structure, which seems to punish those with higher FICO scores while providing a discount to those with lower FICO scores.
And the updated fees are essentially already in effect because they apply to deliveries and acquisitions beginning May 1st, 2023.
FHFA Director Thompson Defends the New Pricing
Last week, FHFA Director Sandra L. Thompson released a statement defending the changes, noting that the agency “is first and foremost a safety and soundness regulator.”
And that “the updated pricing framework will further the safety and soundness of the Enterprises, which will help them better achieve their mission.”
That mission is to support affordable housing for all Americans and “provide reliable liquidity to the market,” including borrowers who are limited by income or wealth.
Thompson added that their new pricing framework “is more accurately aligned to the expected financial performance and risks of the loans they back.”
And it hadn’t been updated in many years prior to a comprehensive review that began in 2021.
That led to “targeted fee increases” for loans on second homes and for high-balance loans, and eventually to cash out refinances.
These types of loans aren’t geared toward the underserved, so the idea was to eliminate any unnecessary pricing incentives.
No one was thrilled about that, but seemed to take it in stride. The bigger 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 some high-FICO score borrowers more than it used to. And charges some low-FICO score borrowers less than it used to.
For example, an applicant with a 740 FICO and 20% down payment used to get hit with a fee of 0.50%.
Going forward, they are being charged 0.875%. This is a difference of 0.375%, or $1,875 on a $500,000 loan amount.
That could result in higher closing costs or a slightly higher mortgage rate, say .125% higher.
So 6.625% instead of 6.50% on a 30-year fixed, or perhaps more money due at closing.
Meanwhile, a 660 FICO score borrower used to be charged 2.75% when putting down 20%.
Now, they’ll only be charged 1.875%, a 0.875% discount relative to the old pricing.
That has led to a lot of anger and finger pointing, and the argument that irresponsible borrowers are getting a break, a “handout” even, while those who have traditionally good credit get punished.
But Thompson argued that folks “mistakenly assume that the prior pricing framework was somehow perfectly calibrated to risk – despite many years passing since that framework was reviewed comprehensively.”
She added that the new “fees associated with a borrower’s credit score and down payment will now be better aligned 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 weren’t being charged enough, while the mid-tier FICO score borrowers were being charged too much.
Whether true or not, it seems this is the new pricing structure and everyone will have to live with it.
For the record, pricing actually improved for those with 780+ FICO scores. So if you want to avoid getting punished, and actually save money, you’ll need excellent credit.
And there’s no incentive for having a lower credit score – the new pricing merely shrinks 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 they didn’t offer a clear alternative or solution, instead simply referring to the new policy as a “disaster.”