Housing Agency Rules Will Force Homeowners With Good Credit to Subsidize High-Risk Borrowers

Single-family home sold for $570,000, in Fishers, Ind. (Courtesy of the Perrey Home Team of Realty One Group New Horizons in Indianapolis, IN)

The Biden administration will soon punish Americans with high credit ratings to pay more for their mortgages to subsidize loans for homebuyers with lower scores.

Starting May 1, Americans purchasing a new home or are refinancing their existing mortgages will have to pay higher mortgage rates and monthly fees if they have a higher credit score, The Washington Times reported on April 18.

Consumers with lower credit scores and less money for a down payment will be given better mortgage rates than they otherwise would have in a form of wealth redistribution by adjusting the fees on loan-level price adjustments.

Experts said that borrowers with a credit score of about 680 would pay more than $40 per month on a $400,000 mortgage, due to new rules issued by the Federal Housing Finance Agency (FHFA).

Homebuyers who make down payments of 15–20 percent will get hit with the largest fees to support those who would normally be unqualified for a mortgage, to buy a home.

FHFA director Sandra Thompson explained that the new rules were designed to “increase pricing support for purchase borrowers limited by income or by wealth” and comes with “minimal” fee changes.

The changes will immediately affect mortgages originating at private banks nationwide, from Wells Fargo to JPMorgan Chase, and will effectively tweak interest rates paid by the vast majority of homebuyers.

“In the wake of a three percentage-point increase in mortgage rates, now is not the time to raise fees on homebuyers,” Kenny Parcell, president of the National Association of Realtors, told the FHFA earlier this year.

Biden Wants to Weaken Mortgage Loan Rules or Racial Equity

The Biden administration has been attempting close the racial gap in homeownership by enacting numerous changes to housing market rules that benefit those at the lower end of the spectrum, such as underprivileged minorities.

The FHFA, which oversees federally backed home mortgage companies Fannie Mae and Freddie Mac, was set up to give consumers more affordable housing options—but instead the White House has made racial equity a top priority.

However, many who work in the housing industry believe the new rules will only serve to frustrate and confuse homeowners.

“The changes do not make sense. Penalizing borrowers with larger downpayments and credit scores will not go over well,” Ian Wright, a senior loan officer at Bay Equity Home Loans, told The Washington Times.

“It overcomplicates things for consumers during a process that can already feel overwhelming with the amount of paperwork, jargon, etc. Confusing the borrower is never a good thing.”

The federally backed agency also raised upfront fees on second homes and for some larger mortgage loans.

“I am all for the first-time buyer having a chance to get into the market, but it’s clear these decisions aren’t being made by folks that understand the entire mortgage process,” Wright continued.

The push to put riskier mortgages into the hands of those who cannot afford homes will, in most cases, likely cause massive disruption to the market when the predicted recession hits.

Former FHA Chief Believes New Regulations Will Disrupt Mortgage Industry

“This confusing approach won’t work, and more importantly couldn’t come at a worse time for an industry struggling to get back on its feet after these past 12 months,” wrote David Stevens, a former commissioner of the Federal Housing Administration, on LinkedIn.

“To do this at the onset of the spring market is almost offensive to the market, consumers, and lenders.”

Stevens, who was also the former CEO of the Mortgage Bankers Association, told the New York Post that these changes are unprecedented and that his “email is full from mortgage companies and CEOs [telling] me how unbelievably shocked they are by this move.”

“This was a blatant and significant cut of fees for their highest-risk borrowers and a clear increase in much better credit quality buyers—which just clarified to the world that this move was a pretty significant cross-subsidy pricing change,” added Stevens.

Although Stevens agreed that the lack of low-income, minority borrowers being able to qualify for affordable homes was an issue, he argued that attempting to manipulate prices would not solve the problem.

“Why was this done? The answer is simple: it was to try to narrow the gap in access to credit, especially for minority homebuyers who often have lower downpayments and lower credit scores,” Stevens said.

“The gap in homeownership opportunity is real. America is facing a severe shortage of affordable homes for sales, combined with excessive demand, causing an imbalance. But convoluting pricing and credit is not the way to solve this problem,” he said.

US Housing Market Already Suffering High Borrowing Rates

The housing market has already been struggling due to multiple interest-rate hikes by the Federal Reserve in its attempts to combat inflation.

The changes could further complicate the complicated mortgage-application process and put more pressure on the remaining segment of buyers in a housing market already facing the worse downturn since 2008.

The average 30-year mortgage rate was at 6.27 percent at the end last week, up from about 5 percent a year ago and more than twice as high from 2021, according to data from Freddie Mac.

The FHFA also eliminated upfront fees last year for first-time buyers who are at or below 100 percent of their area’s median income, or 120 percent in areas that are identified as “high cost.”

After much backlash, the FHFA delayed upfront fee changes for debt-to-income ratios of 40 percent or more to August 1.

The ratio is calculated by dividing a homebuyer’s monthly debt payments by gross income, which is one of the ways lenders determine whether an individual qualifies for a mortgage loan.

Thompson claims the postponement will help “to ensure a level playing field for all lenders to have sufficient time to deploy the fee.”

Mortgage Bankers Association president Bob Broeksmit,sent a letter to Thompson in February explaining that the timing of the fee changes was “especially troubling,” and that the debt-to-income ratio fee creates “operational issues and quality control” for lenders.

“A borrower’s income and expenses can change several times throughout the loan application and underwriting process, especially considering evolving assumptions concerning the nature of debt and income, and the growth in self-employment, part-time employment, and ‘gig economy’ employment,” Broeksmit said.