Leaders React To Mortgage Fee Changes As Debate Continues


Industry leaders and economists are sharing their opinions about changes to fees for loans backed by Fannie Mae and Freddie Mac after reports that homebuyers with good credit scores and substantial down payments will pay more so fees for borrowers limited by income or wealth can be reduced.

The changes to the loan-level price adjustment matrix by officials at the Federal Housing Finance Agency went into effect on May 1 and are the target of two bills in Congress.

Rep. Stephanie Bice of Oklahoma, vice chairwoman of the Republican Main Street Caucus, introduced the Free Market Mortgage Act. She said the changes will force homebuyers with good credit to pay more for their mortgages to subsidize loans to higher-risk borrowers.

“This legislation would prevent Biden’s senseless FHFA policy from being enacted and stops his anti-capitalist agenda,” Bice said in a statement.

Republican Rep. Andy Biggs of Arizona introduced the Responsible Borrowers Protection Act, which has 35 co-sponsors. He said in a statement that “the latest FHFA fee change could result in thousands of dollars in additional fees for lower-risk homeowners over time while encouraging and rewarding financial irresponsibility.”

What are industry leaders and economists saying?

Pierre Debbas, a partner and founding member of the real estate law firm Romer Debbas in New York City, told The Mortgage Note that he’s for legislation to stop these changes.

“I would like to see this initiative implemented at some point — but in a manner that is more beneficial to society and doesn’t penalize a significant portion of homeowners and also double down on the difficulties Americans have in buying a home given the lack of housing supply and the rapid increase in interest rates that have generally not resulted in a decline in affordability,” Debbas said.

Hakan Wildcat, mortgage area manager at Guardian Mortgage in Lawrence, Kansas, told The Mortgage Note “We will have to see how those changes impact the mortgage world for the better or worse.”

“I understand the opposition to the change, especially considering current sales prices,” Wildcat said.

Housing affordability remains the biggest challenge for shoppers right now. Mortgage payments on a home purchase today are more than 85% higher than before the pandemic, and wages haven’t kept up, Orphe Divounguy, senior macroeconomist at Zillow Home Loans, told The Mortgage Note.

“With these fee changes, policymakers are trying to level the playing field for first-time buyers. Some borrowers will pay lower fees and some will pay higher fees, but the spread will be smaller,” Divounguy said.

Divounguy pointed out that under the fee changes, borrowers with high credit scores will still pay less than those with low credit scores. The difference is the penalty for having a lower score will be smaller.

Rajiv Sethi, a professor of Economics at Barnard College at Columbia University, hasn’t taken a position because he believes there are unanswered questions.

“As discussed in my newsletter, I’d like to know whether the FHFA has taken into account the possibility of strategic prepayment,” Sethi said. For those buying expensive homes and are able to afford 20% down, “It might make sense to put down less than 5%, purchase the mandated insurance, and make a large principal payment once the loan has closed.”

The insurance could then be canceled, he said.

“If there’s a strong enough incentive for strategic loan choices along these lines, then the effect will be lower fees flowing to the government sponsored enterprises, which are already undercapitalized. Since greater safety and soundness of the GSEs is an explicit goal of the new fee structure, this might be a cause for concern,” Sethi said.

Leaders at the National Association of Realtors said in a letter to FHFA Director Sandra Thompson that they support the agency’s efforts to improve the fee-setting processes but strongly believe that some of the changes run counter to the Enterprises’ charter duties and should be eliminated.

Thompson issued a statement on April 25 saying much of what has been reported about the changes “advances a fundamental misunderstanding about the fees charged by the Enterprises, and why they were updated.”

“To be clear, the series of steps taken by FHFA to update the Enterprises’ pricing framework will bolster safety and soundness, better ensure the Enterprises fulfill their statutory missions, and more accurately align pricing with the expected financial performance and risks of the underlying loans,” the statement said.

Thompson said it had been years since a comprehensive review of the Enterprises’ pricing framework was conducted.

“FHFA launched such a review in 2021. The objectives were to maintain support for purchase borrowers limited by income or wealth, ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time,” Thompson said.

Thompson said borrowers with higher credit scores will not be charged more so people with lower credit scores can pay less.

“Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat,” Thompson said. “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.”

Civil rights and housing policy organizations, squarely in Thompson’s corner, issued a statement on May 1 supporting the FHFA’s new pricing framework.

The statement was released by the Center for Responsible Lending and was jointly issued by leaders at the National Fair Housing Alliance, Asian Real Estate Association of America, The Leadership Conference on Civil and Human Rights, NAACP Legal Defense and Education Fund, Inc., National Association of Real Estate Brokers, Inc., National Coalition for Asian Pacific American Community Development, National Community Reinvestment Coalition, National Consumer Law Center, National Urban League, and Prosperity Now.

“We commend Director Thompson and FHFA for recent updates to the mortgage pricing framework that represent a critical first step in the journey to create a more equitable system for creditworthy borrowers,” the statement says.

According to the statement, the former loan-level price adjustment matrix created in the wake of the 2008 financial crisis had a disproportionate impact on borrowers of color. The organizations urged the Biden-Harris administration to prioritize restoring safe, fair, and inclusive mortgage pricing.

“The updates help address persistent gaps in wealth and homeownership while also improving safety and soundness for Fannie Mae and Freddie Mac (collectively, the ‘Enterprises’). It is unfortunate that recent inaccurate criticism of the updates has been issued without the context of data, analysis, or history,” the statement says.

Patrick McHenry, Republican chair of the House Financial Services Committee, has demanded that the FHFA reverse the changes. He said the committee will be forced to take action to repeal them through legislation and reconsider the authority of the agency to implement pricing changes moving forward.

There’s no evidence supporting the notion – active on the rumor mill — suggesting that President Joe Biden was advocating for these changes.

However, the Biden-Harris administration has emphasized its support for first-time homebuyers and buyers of color. In February, it was announced that annual mortgage insurance premiums would be reduced by the Federal Housing Administration, saving homeowners with FHA-insured mortgages an average of $800 per year.

The mortgage insurance premium is a monthly fee that homeowners pay to insure their mortgages, which is paid on top of monthly principal and interest payments.

“Homeownership is currently the principal source of wealth creation for most American households. But due to a nationwide shortfall in the supply of affordable homes and shifting demand for housing during the pandemic, first-time homebuyers have struggled in recent years to achieve homeownership. First-generation homebuyers and first-time homebuyers of color – who are less likely to have sufficient resources for a sizeable down payment due to a longstanding gap in intergenerational wealth transfers – have been particularly affected,” a press release from the time says. “Today’s announcement is an important step in making homeownership more attainable.”

Editor Kimberley Haas contributed to this report.

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