iStock photo

Federal Housing Finance Agency Director Sandra L. Thompson is pushing back against claims the agency’s recent changes to how Fannie Mae and Freddie Mac mortgages are priced will lead to buyers with better credit paying more than buyers with worse credit.

The changes, which go into effect May 1, are being slammed by some industry figures, most prominently Obama administration Federal Housing Administration commissioner and former Mortgage Bankers Association CEO David Stevens. In widely circulated comments made to the New York Post, Stevens called the Loan Level Price Adjustment changes “unprecedented” and “a blatant and significant cut of fees for their highest-risk borrowers and a clear increase in much better credit quality buyers.”

The FHFA’s changes include the elimination of up-front fees for creditworthy first-time buyers at or below 100 percent of area median income, or 120 percent in high-cost markets, and hikes to fees on second-home loans, high-balance loans and cash-out refinances. But the biggest and most controversial changes have been the addition of a fee for borrowers with debt-to-income ratios above 40 percent, with lenders arguing that logistical challenges verifying a borrower’s income before a rate gets locked expose them to distrust from their customers. Industry pushback caused this latter fee to be delayed until August.

In a statement released this week, Thompson responded to a range of different claims about the changes that, she said, were muddying the waters about what the fee changes actually do. The changes, she said, were partly motivated to help everyday Americans better afford homes in the current market and to more accurately price the risk associated with each loan. Her statement singled out six points that she called “misconceptions” and “fundamental misunderstandings”:

• “Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less. The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”
• “Some updated fees are higher and some are lower, in differing amounts. They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.”
• “Some mistakenly assume that the prior pricing framework was somehow perfectly calibrated to risk – despite many years passing since that framework was reviewed comprehensively. The 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.”
• “The new framework does not provide incentives for a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20 percent of the home’s value typically pay mortgage insurance premiums, so these must be added to the fees charged by the Enterprises when considering a borrower’s total costs.”
• “The targeted eliminations of upfront fees for borrowers with lower incomes – not lower credit scores – primarily are supported by the higher fees on products such as second homes and cash-out refinances. The Enterprises’ statutory charters specifically include references to supporting low- and moderate-income families by earning returns on mortgages for these borrowers that may be less than the returns earned on other products. Indeed, Congress incorporated this into the Enterprises’ charters decades ago and it is a long-standing component of the Enterprises’ core business models.”
• “The changes to the pricing framework were not designed to stimulate mortgage demand. We publicly announced the objectives of the pricing review at its onset (as noted above), and stimulating demand was never a goal of our work.”