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The head of Fannie Mae and Freddie Mac’s federal regulator says the agency will push forward in the face of mounting criticism from industry groups and implement fee increases targeting some homebuyers making moderate down payments or taking out loans that might stretch their finances.
The risk-based fee increases are aimed at better ensuring Fannie and Freddie’s safety and soundness — and not to subsidize fee waivers for first-time homebuyers of limited means, as some critics have alleged, Federal Housing Finance Agency Director Sandra Thompson said Tuesday.
One of the fee increases, which applies to borrowers taking out loans with high loan-to-value (LTV) ratios, will take effect Monday as planned.
The other increase — a new fee that targets some borrowers taking out mortgages with debt-to-income (DTI) ratios exceeding 40 percent — was also scheduled to take effect on May 1. But last month, FHFA announced that it would delay implementation of the DTI-based fee until Aug. 1 to give lenders more time to update their systems.
“Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less,” Thompson said in a statement aimed at addressing “a series of misconceptions” about the changes. “The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”
But Clifford Rossi — a former executive at both Fannie and Freddie and a professor at the University of Maryland’s Robert H. Smith School of Business — said the pending changes to mortgage fees will put the housing finance system at greater risk.
The pricing changes “will increase the cost of borrowing for a sizable borrowing cohort that presents very low credit risk while greatly lowering the cost of borrowing for borrowers that pose significant credit risk to Fannie and Freddie,” Rossi said in a commentary piece Tuesday.
Rossi estimates that more than 25 percent of prospective borrowers will see their fees go up when the LTV increase goes into effect Monday. A homebuyer with a strong credit score putting 15 percent down and borrowing $300,000 at 6.4 percent would pay about $360 more a year to finance the new fee through their mortgage payments.
“While this does not seem to be a substantial increase, on top of higher mortgage rates and inflation already embedded in the economy, it creates an additional financial headwind for these borrowers,” Rossi wrote.
Critics have also pointed out that some homebuyers putting 20 percent down when purchasing a home will pay more upfront fees than buyers making smaller down payments.
Jim Parrott, a nonresident fellow at the Urban Institute and owner of Parrott Ryan Advisors, pointed out that because buyers purchasing homes with less than 20 percent down are also required to take out private mortgage insurance, they’ll end up paying more in the long run.
If the cost of private mortgage insurance is added to the Fannie and Freddie’s pricing grids, “the borrowers’ costs will track their risk as one would expect: those with lower credit scores will pay more than those with higher credit scores, and those with higher LTV ratios will pay more than those with lower LTV ratios,” Parrott noted in a blog post.
“Despite the recent coverage, then, FHFA is not raising fees on borrowers with good credit to lower them for those with bad credit,” Parrott wrote. “It is raising fees on loans there is little reason to discount so that it can better serve those who need the help.”
Fee adjustments rolled out in three stages
Rising home prices have pushed Fannie and Freddie’s conforming loan limit past the $1 million threshold in many high-cost markets. But FHFA wants the mortgage giants to help more low-income Americans become homebuyers and reduce racial homeownership gaps.
To do so, the agency has rolled out a series of changes to loan level price adjustments (LLPAs), upfront fees that lenders pay when selling mortgages to Fannie and Freddie:
“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,” Thompson said Tuesday. Fannie and Freddie’s 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.”
The National Association of Realtors (NAR) said in January that it supported waiving fees for first-time homebuyers of limited means, but not by raising fees on middle-class buyers.
“In the wake of a three-percentage point increase in mortgage rates, now is not the time to raise fees on homebuyers,” NAR President Kenny Parcell said at the time.
In January, the Mortgage Bankers Association (MBA) urged FHFA to give lenders more time to implement the new DTI-based fee. Although implementation of that fee has been pushed back three months, MBA CEO Bob Broeksmit is now calling the DTI-based fee “unworkable,” and arguing that it should be replaced.
“Imagine being a borrower who is quoted one rate when applying for a loan, then getting near closing and hearing from your lender that, due to a slightly slower month at work or a higher homeowner’s insurance premium, the cost of your loan will have to go up because you exceeded FHFA’s DTI threshold,” Broeksmit wrote in an April 20 blog post.
The “machinations” caused by the DTI fee “will be perceived by the consumer as the lender constantly moving the goalposts, jeopardizing the trust between borrowers and lenders,” Broeksmit warned. “For lenders, verifying multiple changes in the DTI during the underwriting stage of the loan process would introduce a host of operational and compliance issues, requiring extensive training and updates to processes and technology systems.”
Editor’s note: This story has been updated to include perspective from Urban Institute nonresident fellow Jim Parrott.
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Email Matt Carter