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Lew Sichelman
No one should deny anyone an equal shot at the American dream. A leg up may even be warranted.
But should people who have worked hard to build decent credit and squirrel away funds for a down payment pay a little higher mortgage rate – all to help secure a lower rate for those who haven’t done the same?
That’s what some in the mortgage industry say will happen with the new government loan-level pricing adjustment requirements.
The new pricing structure has been partially in effect as of May 1, after having been postponed once before. Additional rules are set to take effect Aug. 1. But shifting deadlines haven’t stopped the issue from becoming something of a political football.
Two Republican lawmakers have introduced separate bills, one with more than 30 GOP co-sponsors, to cancel the new pricing structure. And fiscal officers from 27 state governments have asked President Joe Biden and Federal Housing Finance Agency Director Sandra Thompson to scrap it.
But Thompson said their reading of the new pricing structure is off-base. In an unusual statement aimed at “setting the record straight,” the FHFA director said the notion that borrowers with higher credit scores will be charged more to subsidize those with lower scores is just plain wrong.
“Much of what has been reported advances a fundamental misunderstanding about the fees charged by the Enterprises, and why they were updated,” Thompson said in her statement.
(“The Enterprises” are Fannie Mae and Freddie Mac, the two government-sponsored entities, or GSEs, that purchase mortgages from Main Street lenders.)
Thompson explained that the new pricing is intended to bolster the safety and soundness of Fannie and Freddie, which have been under conservatorship since they flirted with failure almost 15 years ago during the Great Recession. Noting GSE pricing hasn’t been updated for “many years,” she also said the new structure will “more accurately align” prices with the risks associated with the loans purchased by the entities.
But Thompson went further, adding that the new pricing will “better ensure the Enterprises fulfill their statutory missions.” That includes supporting low- and moderate-income families.
And that is where the misconceptions arise.
“Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” she said. She points out that lower upfront fees for borrowers with lower incomes – not lower credit scores – are supported primarily by higher fees on loans for second homes and refinances, not on conventional loans for the purchase of primary residences.
An ‘Outrage’?
But John Meussner of Mason-McDuffie Mortgage in Fair Oaks, California, is one lender who sees it differently. He thinks the new pricing structure is an “outrage.”
“Personally, I’m all for giving price breaks to people with lower credit and lower down payments,” McDuffie posted on the ActiveRain real estate site. “My concern is that those ‘price breaks’ are being subsidized by charging those with excellent credit and money to put down additional fees.”
Dorie Dillard, a Coldwell Banker agent in Austin, Texas, also questioned the new fee schedule, calling it “absolutely unfair.” Instead of being rewarded for fiscal responsibly, she griped, some borrowers “are [being] penalized!”
Rob Spinosa of Guaranteed Rate in Marin County, California, has a different view, though. While it will be less expensive for some borrowers and more expensive for others, he is certain that there will be “zero” chance that a bad-credit borrower will get a better rate than one with good credit.
Is New System Workable?
Others question the workability of the new pricing system. Mortgage Bankers Association President Robert Broeksmit said the change would be a nightmare for both lenders and their customers – creating operational and compliance challenges for lenders while leading to “a frustrating and confusing experience” for borrowers.
Say, for example, you apply for a loan at a certain rate and are approved by a lender. But before you reach the settlement table, your lender said your rate will have to increase a bit because the insurance premium on the house you’re buying came in higher than anticipated, which raised your debt-to-income ratio.
Or maybe your income took a bit of a hit when your employer cut you back from five days a week to four. You still earn enough to qualify, but because your DTI ratio is now higher, you’ll have to accept a higher rate than you were originally quoted.
“A borrower’s income and expenses can change multiple times throughout the loan application and underwriting process,” Broeksmit warned. “The resulting fluctuations in DTI could result in multiple changes to a borrower’s loan pricing in the period between application and closing.”
Some Bewildered by Changes
Todd LaBorwit of Topaz Mortgage in the Washington, D.C., region said he’s bewildered by the new pricing – so much so that he hasn’t a clue how to advise his clients.
“I don’t know what to do,” he told me. “I’ve never seen anything like it in my life.”
Thompson of the FHFA said the new pricing framework does not encourage a borrower to make a lower down payment to benefit from lower fees. She also said some updated fees are higher and some are lower, but that they don’t represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores and/or large down payments will see their fees decrease or remain flat, she promises.
David Stevens, a former Federal Housing Administration official and previous leader of the MBA, said that he’s opposed to the changes because he fears Fannie Mae and Freddie Mac are being politicized – “whipsawing” the GSEs based on whichever party is in power.
But in the end, Stevens believes, “borrowers really won’t know the difference in any significant way.”
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
