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‘Culture war’ erupts over mortgage fee hikes for borrowers

April 28, 2023

The news landed like red meat at a conservative political rally.

Acting “in the dark of night,” the narrative goes, the Biden administration is raising mortgage fees for low-risk borrowers to pay for discounts on riskier borrowers with lower credit scores.

Critics say the change, effective Monday, May 1, penalizes sensible, middle-income borrowers to help low-income and minority households buy homes.

“This is left-wing, socialist ideology,” said Fox News business commentator Larry Kudlow, a Trump Administration economic advisor. “This is an outrage. This is an attack on the American dream.”

On Wednesday, 18 GOP senators sent a letter to the Federal Housing Finance Agency, which oversees government-sponsored mortgage giants Fannie Mae and Freddie Mac, calling the fee revision a shortsighted policy that “punishes hardworking Americans for their fiscal prudence.”

The FHFA pushed back, adamantly denying that low-risk borrowers are subsidizing fee cuts for higher-risk borrowers.

“Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” FHFA Director Sandra Thompson said in a statement Tuesday. “The updated fees, as was true of the prior fees, generally increase as credit scores decrease.”

Meanwhile, real estate industry groups weighed in, complaining that fee hikes are bad because they put homeownership — already unaffordable due to high prices and high interest rates — even further out of reach.

“I think, unfortunately, a debate about a housing policy issue became very politicized and is clearly being used … as an opportunity to beat up on the FHFA and Freddie and Fannie,” said Dave Stevens, a former Mortgage Bankers Association CEO who served as Federal Housing Administration commissioner during the Obama Administration. “A simple debate over a housing policy issue has now clearly become wrapped up into a kind of culture war.”

Upfront fees

For more than half a century, Fannie Mae and Freddie Mac ensured there was adequate cash in the housing market by buying “conforming” mortgages from banks and other lenders, freeing them up to lend more money to additional buyers. It’s also part of their “statutory mission” to make homeownership affordable, Thompson said.

The two enterprises accounted for 52% of U.S. mortgage volume since 2019, according to figures from Black Knight. The combined value of those new loans totaled nearly $7.3 trillion over the past 4 ¼ years.

As compensation for guaranteeing their loans, the two lending agencies charge upfront fees that vary based on the borrower’s down payment and credit score.

Lenders pay Fannie and Freddie the upfront fees when selling the loans, then pass them on to the consumer, typically as a bump in their mortgage interest rate.

Starting in January 2022, the FHFA began announcing a series of changes to those upfront fees, known at Fannie Mae as “loan-level price adjustments,” or LLPAs, and as credit fees at Freddie Mac.

The FHFA said the changes were part of a long-overdue recalibration designed to strengthen Fannie and Freddie’s “safety and soundness.”

Some of the changes, FHFA added, seek to help first-time homebuyers and low- and moderate-income borrowers. Among those changes:

— Elimination of upfront fees for moderate- to low-income first-time homebuyers as well as the elimination of fees for borrowers participating in affordable mortgage programs like HomeReady, Home Possible and HFA Advantage loans.

— Higher upfront fees for second-home loans, high-balance loans (ranging from $726,201 to $1.089 million) and cash-out refinances — loans that aren’t part of Fannie’s and Freddie’s “core mission.” Customers for these types of loans have other alternatives in the marketplace, The FHFA said.

— A new upfront fee for borrowers with debts exceeding 40% of their income. (An outcry over the so-called debt-to-income or DTI fee prompted FHFA to postpone implementation until Aug. 1.)

— A new fee structure that raises fees for some borrowers and lowers it for others. FHFA said it’s designed to improve Fannie’s and Freddie’s capital position while also helping households “limited by wealth or income” to buy homes.

“These actions … create a more resilient housing finance system,” Thompson said.

‘Misperceptions’

Among the misperceptions, the FHFA says, is a claim that those with lower credit scores will pay smaller fees than better-performing borrowers under the new plan.

Not true, the agency said.

While fees will go up for some good-scoring borrowers and down for others with lower scores, those with poorer credit still will pay more overall. However, the gap between the two will be smaller.

For example, a borrower with a score of 640 putting 20% down on a $500,000 mortgage will see his or her fee drop to $11,250 under the new plan, down from $12,500.

For a borrower with a score of 740 making that same down payment on that same loan, the new fee will rise to $4,375, up from $2,500 before the change. Despite the increase, this borrower’s fees still are lower than the borrower with lower credit scores.

According to the FHFA, the new fees typically translate into a 0.05% percentage point increase in a borrower’s mortgage rate.

For someone buying a Southern California home with a median price of $705,000, that’s equivalent to an $18 increase in his or her monthly mortgage payment, or $6,480 over the life of a 30-year loan.

Credit risk

While the FHFA maintains it merely is updating its pricing framework to protect Fannie Mae and Freddie Mac against credit risk, critics argue it’s doing just the opposite.

“FHFA … willfully ignores the realities of creditworthiness in an effort to push Americans into homes they may be ill-suited to afford,” said the GOP letter, spearheaded by Sen. Roger “Doc” Marshall, R-Kan., and Sen. Thom Tillis, R-N.C. “The fact that a proposal flaunting credit risk is being openly pushed by FHFA just a decade-and-a-half after the housing-led 2008 financial crisis is staggering.”

The FHFA denies there’s an increased risk of a 2007-style mortgage meltdown because underwriting standards remain unchanged.

And it disputes claims the new fee structure subsidizes bad credit scores at the cost of good credit scores.

There is a subsidy in the new framework, but it’s coming from fee hikes on second-home loans, high-balance loans and cash-out refinances, not from borrowers with higher credit scores, the FHFA said.

Nevertheless, some industry leaders dispute FHFA claims there’s no subsidy coming from higher-scoring borrowers.

“It’s quite the opposite of risk-based pricing,” said Jerry Howard, CEO of the National Association of Home Builders, calling the new matrix “income distribution.”

Stevens, the former FHA commissioner, said he knows better after four decades in the mortgage industry, including almost a decade running the single-family business for Freddie Mac.

“I know LLPAs and their history,” Stevens said. “These are significant adjustments. And it wasn’t just a pure risk-based price adjustment based on some new view of risk.”

In a statement issued Wednesday, National Association of Realtors President Kenny Parcell praised the fee cuts contained in the new matrix. But he criticized fee hikes, calling them unnecessary and saying they impact both trade-up borrowers and middle-wealth Americans affected by rising home prices and higher mortgage rates.

“These borrowers face the same surge in financing costs as entry-level homebuyers experienced over the last year,” Purcell said.

Taken together, the fee reforms are “a mixed bag,” said the NAHB’s Howard.

“It potentially will provide people with homeownership opportunities they wouldn’t have had. And that’s important,” Howard said in a phone interview. “(But) unless there is some really strict monitoring and underwriting, you are allowing a more risky borrowing pool into the market. … Robbing Peter to pay Paul is a nice political maneuver to appeal to the base that the administration wants to appeal to, but it is not a fix for the problem.”

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Orange County Register