You’ve likely heard about the new mortgage fees.
It is so bad that Pennsylvania State Treasurer Stacy Garrity has sent a Letter today to President Joe Biden and the FHFA urging their elimination.
The letter was also signed by 32 other fiscal officers, who are all opposed to the new mortgage pricing.
They believe that it is unfair for borrowers with high FICO scores to subsidize borrowers with low FICO scores by paying more.
The new pricing is a major deal, as it applies to Fannie Mae mortgages and Freddie Mac mortgages which together account for approximately 60% of the residential market.
Fannie Mae, Freddie Mac, and the FHFA: A Background Overview
Fannie Mae & Freddie Mac are the two largest mortgage lenders in existence today. These are the most popular types of home loans available.
These loans are called conforming Mortgages, because they comply with the guidelines for Fannie Mae or Freddie Mac.
The Federal Housing Finance Agency, which was only established in 2008, is responsible for overseeing these loans.
Since then, both have been placed under conservatorship due to the housing crisis. They are now essentially quasi-government organizations.
The FHFA is responsible for setting a pricing framework that applies to mortgages backed up by Fannie Mae and Freddie Mac.
Loan-level price adjustments (also known as LLPAs) are applicable to all conforming mortgages. This includes HomeReady and some other low-income options.
The fees charged are based on credit score loan to value ratio occupancy types and property types.
The FHFA uses a risk-based pricing system for the loans that it buys and securitizes.
These fees enable it to function well and to serve its mission to promote homeownership by, among other things providing low interest rates for American homebuyers.
The new pricing structure seems to penalize those with higher FICO score while offering a discount for those with lower scores.
The updated fees have already been implemented, as they are applicable to all deliveries and purchases made after May 1, 2023.
FHFA Director Thompson defends the new pricing
Last week, FHFA director Sandra L. Thompson issued a Statement to defend the changes. She noted that the agency is “first and foremost a safety-soundness regulator.”
The updated pricing framework “will further safety and soundness for the Enterprises which will help them achieve their mission better.”
This mission is to provide affordable housing to all Americans, and to “provide reliable liquidity to market”, including to borrowers whose income or wealth limits them.
Thompson said that the new pricing structure “is better aligned with the expected financial performance of the loans and the risks they back.”
It hadn’t even been updated for many years before a thorough review began in 2021.
This led to “targeted fees increases” on loans for second homes, high-balanced loans and cash-out refinances.
The idea was to remove any unnecessary price incentives because these loans weren’t designed for the underserved.
Everyone seemed to accept it. Now, the bigger problem is that these latest price changes will affect almost all homeowners.
Why opponents don’t like the new mortgage fees
The new pricing matrix simply charges some borrowers with high FICO scores more than before. Some low-FICO score lenders are charged less.
For example, a candidate with a FICO of 740 and a 20% down payment was hit with a fee 0.50%.
They will be charged 0.875% going forward. This represents a difference between 0.375% and $1,875 for a loan of $500,000
This could lead to higher closing costs, or even a slight increase in the mortgage rate.
On a fixed 30-year term, 6.625% is the new 6.50% or you may have to pay more at closing.
A borrower with a FICO score of 660 used to pay 2.75% for a 20% deposit.
They’ll now only pay 1.875% – a discount of 0.875% compared to the previous pricing.
This has caused a lot anger and finger-pointing. Some have even argued that irresponsible lenders are given a “handout”, while those with good credit history get punished.
Thompson said that people “mistakenly believe that the previous pricing framework is perfectly calibrated for risk, despite years having passed since it was reviewed in detail.”
She said that “the new fees associated with a borrower’s credit score and the down payment will be better aligned to the expected long-term performance of these mortgages relative their risks.”
It’s possible, then, that borrowers with high FICO scores were not being charged enough while borrowers with mid-tier FICO scores were being overcharged.
It seems that this new pricing structure is true and everyone has to accept it.
In fact, those with FICO scores above 780 actually saw a decrease in pricing. If you want to save money and avoid being punished, then you will need good credit.
There’s no incentive to have a low credit score. The new pricing simply shrinks the difference between high and lower credit scores.
You’ll pay the same amount for a FICO score of 640 as you would for one of 740, but not quite as much.
This letter is unlikely to change anything. They didn’t provide a solution or alternative, but instead referred to the new policy simply as “a disaster.”