By Charlie Wells
New rules that increase fees on some new mortgages look like a raw deal at first blush, appearing to penalize house hunters who’ve worked hard to keep their credit scores high.
But the reality is more complicated. The changes, which take effect May 1, are part of the Biden administration’s plan to expand access to homeownership. They involve the fees charged to borrowers by Fannie Mae and Freddie Mac, which back roughly half of US mortgages.
Before the rule change, a borrower with a credit score of 740 and a 15% down payment would have faced a 0.25% fee on their mortgage. After the change, that fee will rise to 1%. It’s the opposite story for some borrowers with lower credit ratings: Someone with a score of 640 putting down 15% would have paid a 3.25% fee before. After the change, it will fall to 2.5%.
Read more: Biden Targets Mortgage Fee Overhaul to Narrow Homeownership Gap
The changes have set off a fierce debate. Critics say they punish aspiring homeowners who worked hard to build sterling credit and will expand homeownership at the wrong time, with a potential recession on the horizon. Mark Calabria, who ran the Federal Housing Finance Agency during the Trump administration, has said buyers with weak credit and low down payments are especially vulnerable to default, and it’s the equivalent of putting “someone out there in a rubber dinghy during a tsunami.”
Housing advocates, meanwhile, say the new structure will help first-time and low-income buyers at a time when housing prices remain elevated and mortgage rates are higher than they’ve been in years. For its part, the FHFA, which oversees Fannie Mae and Freddie Mac, said it’s simply recalibrating its risk-based pricing.
To unpack the pros and the cons of the policy, Bloomberg News interviewed Vanessa Perry, a professor at the George Washington University School of Business who researches mortgages and the housing market. Her answers are below, lightly edited for length and clarity.
Q. Why is the FHFA changing mortgage fees?
A. The FHFA has taken a number of steps to increase opportunities for homeownership for low- and moderate-income borrowers, as well as those from historically disadvantaged, traditionally underrepresented groups. There are very few levers available to do this, but one approach is to lower the cost for folks who may have imperfect credit. What these changes have done is at least attempt to provide home-lending alternatives that are less expensive in the conventional market for these borrowers.
On some level there’s always some sort of a cross-subsidy going on in the background. But that’s more on a conceptual level than what I think is really happening here, which is an overall adjustment. It’s probably more accurate to say that what the FHFA has done is look at where the risks lie and re-estimate the costs associated with bearing those risks overall.
The FHFA has all these data over multiple years and multiple economic cycles about what characteristics are most likely to lead to default losses, and that data is the basis of these new prices.
Q. Who will have to pay more in mortgage fees as a result of these changes?
A. There will be some people who have strong credit scores who will pay a bit more, but those will mostly be people with lower down payments. It’s not the case that every category of person with good credit will pay more. There’s not that sort of direct relationship here and it does not affect any particular category of borrower across the board.
Risk-based pricing is not new. It’s complicated, but it’s widely accepted in the industry that the two key drivers of default risk include equity — which is the loan-to-value ratio, or down payment — and credit history.
Q. How should buyers react to fee adjustments?
A. I would have the same advice for people with both high credit scores and low credit scores. And that advice is: Talk to your lender and perhaps talk to more than one, making sure they present you with options including what it would cost you both upfront and over time for a conventional loan, as well as a Federal Housing Administration loan.
That’s important because these changes have shifted the competitive landscape between these two types of mortgages. Depending on a household’s financial picture, one may actually be more advantageous than the other. These fee changes have altered that choice and made it less straightforward than maybe it would have been before. Borrowers could really end up saving significant amounts of money in one market versus the other. So it is definitely more important now to have that comparison upfront.
Having a higher deposit may help lower fees, but it may not. It also depends on a borrower’s credit score. There is no silver bullet because they didn’t do a blanket increase. Some fees didn’t change at all, but others went up. That’s what makes it more complicated. In general, having more equity upfront is a good thing. However, there are tradeoffs. And if there’s no financial benefit to you for that tradeoff, there may be other things you could do with that money that would potentially have a higher return than putting that additional amount down.
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