Hat tip to the readers who sent in this article found in the tabloid newspaper NY Post. It mentions the Fannie/Freddie fee increase for those with higher credit scores, and fee discount for those with lower credit scores. All the revised policy does is reduce the gap – those with lower credit scores are still paying more.
An excerpt:
LLPAs are upfront fees based on factors such as a borrower’s credit score and the size of their down payment. The fees are typically converted into percentage points that alter the buyer’s mortgage rate.
Under the revised LLPA pricing structure, a home buyer with a 740 FICO credit score and a 15% to 20% down payment will face a 1% surcharge – an increase of 0.750% compared to the old fee of just 0.250%.
When absorbed into a long-term mortgage rate, the increase is the equivalent of slightly less than a quarter percentage point in mortgage rate. On a $400,000 loan with a 6% mortgage rate, that buyer could expect their monthly payment to rise by about $40, according to calculations by Stevens.
Meanwhile, buyers with credit scores of 679 or lower will have their fees slashed, resulting in more favorable mortgage rates. For example, a buyer with a 620 FICO credit score with a down payment of 5% or less gets a 1.75% fee discount – a decrease from the old fee rate of 3.50% for that bracket.
When absorbed into the long-term mortgage rate, that equates to a 0.4% to 0.5% discount.
Wow! So, you’re getting penalized for having a higher credit score and larger down payment!? America! What a country! LOL!
Not only that, but Fannie/Freddie are getting (and taking) credit for making it cheaper for those less privledged.
But they are charging them substantially more than those with excellent credit, which sounds discriminatory at the least, and a bigger hurdle for those less fortunate.
What a country indeed!
How about no fees and just fund the loans, dang it?
https://www.mortgagenewsdaily.com/markets/mortgage-rates-04212023
Seemingly overnight, the internet is awash with news regarding a “new,” unfair tax on mortgage borrowers with higher credit scores. Some have gone so far as to suggest that someone could intentionally lower their credit score in order to get a better deal.
Before you stop paying your bills in the hope of cashing in, let’s separate fact from fiction. First and most importantly, you will absolutely NOT get a better deal on a mortgage rate if your credit score is lower, even if your nephew just texted you a screenshot of a news headline saying “620 FICO SCORE GETS A 1.75% FEE DISCOUNT” and “740 FICO SCORE PAYS 1% FEE.”
So why would your nephew make such a claim?
This all has to do with changes to Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac (the “agencies”), the two entities that guaranty a vast majority of new mortgages.
LLPAs are based on loan features such as your credit score and the loan-to-value ratio among other things. They’ve been changed several times over the years and a fairly substantial change was announced in January of this year.
There’s no scenario where someone with lower credit will have a lower fee.
If you have a score of 640, you’ll be paying significantly more than if you had a 740.
Using an 80% loan-to-value ratio as an example, your LLPA at 640 is 2.25% versus 0.875% for a 740 score. That’s a difference of 1.375%, or just over $4000 on a $300k mortgage. This is almost HALF the previous difference, and that’s certainly a big change.
Great job explaining this,, been on the horn all day trying to explain the hype, while yes you don’t get as big a discount as you use to,, you are certainly NOT getting the same deal with a 760 credit score as a 620 credit score.. Aagin, great job here.
Thanks Eddie!
The lies are sexier than the truth these days!
Credit scores and wealth are not always in lockstep. Plenty of people who make good money have terrible credit scores due to bad decisions. This isn’t a tax on the rich it’s a tax on personal responsibility.
Yes, good explanation Jim. Upon reading the articles, I immediately downloaded the FNMA LLPA matrix. My question is this: why at the 85% LTV do the LLPAs begin to decrease?
Private mortgage insurance was always cheaper at 85% than at 90%, and at 90% it was cheaper than 95% LTV, so assuming it is all risk-related.
Does this only apply to FHA Loans and not traditional (private lender) mortgages?
These are Fannie Mae and Freddie Mac price adjustments, which is where virtually all mortgages end up – they are the government-sponsored entities that purchase loans in bulk on the secondary market.
FHA loans have higher fees.
Setting the Record Straight on Mortgage Pricing: A Statement from FHFA Director Sandra L. Thompson
FOR IMMEDIATE RELEASE
4/25/2023
Recently, there has been increased focus on changes made by the Federal Housing Finance Agency (FHFA) to the pricing framework of Fannie Mae and Freddie Mac (the Enterprises). Unfortunately, much of what has been reported 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.
FHFA is first and foremost a safety and soundness regulator, and the Enterprises were chartered by Congress with a mission to provide liquidity, stability, and affordability by facilitating responsible access to mortgage credit through their activities in the secondary market. To achieve this mission, the Enterprises charge fees to compensate them for guaranteeing borrowers’ mortgage payments, which in turn attracts investors across the globe to provide liquidity for the U.S. mortgage market and, ultimately, reduces interest rates for homeowners.
A portion of their fees are “upfront” fees that are based on risk characteristics of the borrowers and the loans they are obtaining. Said differently, the Enterprises engage in risk-based pricing to, among other things, better ensure their safety and soundness, protect taxpayers, and serve their mission.
It had been many 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.
We took a series of steps over the past 18 months to achieve these objectives. First, we announced targeted fee increases for second home loans and high balance loans and, later, cash-out refinances. Next, we announced the elimination of upfront fees for certain groups core to the Enterprises’ mission, such as first-time homebuyers with lower incomes who nonetheless have the financial capacity and creditworthiness to sustain a mortgage. Finally, in January, we announced a recalibration of the upfront fees for most purchase and rate-term refinance loans. These actions work collectively to create a more resilient housing finance system.
This final step, in particular, seems to have attracted a series of recent misconceptions despite being announced over three months ago.
So let me address some of these misconceptions directly:
-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.
So why does all this matter?
Since entering conservatorship in 2008, the Enterprises have remained undercapitalized and maintain a taxpayer backstop should they confront significant losses. This change will better protect taxpayers in the long term and put the Enterprises on more durable footing, which will allow them to support affordable, sustainable mortgage credit across the economic cycle to the benefit of all Americans.
The updated pricing framework will further the safety and soundness of the Enterprises, which will help them better achieve their mission. They will provide reliable liquidity to the market while also providing more targeted support for creditworthy borrowers limited by income or wealth. And they will do so with a pricing framework that is more accurately aligned to the expected financial performance and risks of the loans they back.