A new Biden administration rule requiring lower mortgage fees for riskier borrowers, paid for by higher fees for less risky borrowers, has stirred up a hornet’s nest of opposition.
The Federal Housing Finance Agency, the “safety and soundness” regulator of mortgage-lending giants Fannie Mae and Freddie Mac, directed the two government-sponsored enterprises to make changes to the upfront fees they charge borrowers beginning May 1. FHFA director Sandra Thompson said fees will be eliminated for “certain groups core to the Enterprises’ mission, such as first-time homeowners with lower incomes,” while other borrowers buying homes or refinancing loans will pay more.
In a statement released Tuesday, Thompson complained about “misconceptions” and insisted that “higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less.” She said fees are being eliminated “for borrowers with lower incomes, not lower credit scores.”
However, Thompson neglected to mention that last October, the FHFA changed the way it calculates credit scores, replacing the traditional FICO credit score model it had used for decades with FICO 10T and VantageScore 4.0. Thompson called the new models “more inclusive” and said they would provide the market with “an improved understanding of risk.”
Not everybody thinks it’s an improvement. House Financial Services Chair Rep. Patrick McHenry, R-North Carolina, and Housing and Insurance subcommittee chair Rep. Warren Davidson, R-Ohio, sent a scathing letter to Thompson on Tuesday warning that legislation may follow unless the administration calls off the new pricing rules.
“These changes cannot be justified from a risk management perspective, and amount to a tax on all creditworthy GSE homebuyers to subsidize borrowers with riskier loans,” the lawmakers wrote. They added that there is “no doubt that lenders will pass on the new LLPA (loan-level price adjustment) costs to borrowers, which will result in higher mortgage rates and reduced access to credit.”
On the other side of the Capitol, 18 Republican senators sent a similar letter to Thompson, demanding details of how the policy decision was reached. The senators wrote that it “establishes a perverse incentive that punishes hardworking Americans for their fiscal prudence.”
The FHFA’s loan-level price adjustment varies according to the type of loan, type of property, loan-to-value ratio, debt-to-income ratio and credit score. The agency chose to make cash-out refinance loans and mortgages for second homes more expensive. Thompson said these higher fees will support the “targeted” elimination of fees to borrowers with lower incomes.
The pricing redesign has many critics. The Mortgage Bankers Association told the FHFA that the debt-to-income component is “unworkable and should be replaced,” but the agency would only agree to delay that component until Aug. 1.
Thompson said the first objective of the new policy is to support borrowers who are “limited by income or wealth.” But if large numbers of buyers are coaxed into home loans they can’t afford, waves of foreclosures can result, especially when interest rates are rising. Fannie Mae and Freddie Mac are still in conservatorship following their rapid expansion that led, in 2008, to a nearly $200 billion taxpayer bailout.
This time the Biden administration wants to subsidize higher-risk borrowers by openly raising costs for all other borrowers, as if it’s the government’s job to force some customers to pay more so others can pay less.
It’s not. The sooner they figure that out, the better.