by: Doug Reed
If you’ve worked hard all your life to keep good credit, pay your bills on time and you want to take out a loan on the American dream, your own home, you’ll pay more than that person that doesn’t pay their bills on time and has bad credit.
You’ve been raised correctly, you work hard, pay your bills on time and enjoy a good credit score probably in excess of 680. Further you’re looking forward to owning a piece of one of the American dreams, your own home.
Starting in May, if you take out a new mortgage and have good credit – it’s going to cost you!
When I first saw this, I really couldn’t believe my eyes, so I knew it was time to dig in and do the research, to find out what was the truth, where are the lies and what’s being hidden from the American public as this is a direct blow to your financial well-being. Further, being a financial advisor, investment advisor and manager and with a background in mortgage lending, this was extremely hard to believe.
What I found out was shocking!
Fannie Mae and Freddie Mac whom are the purchasers and ultimate servicers of mortgages nationwide and under the command of the FHFA ( Federal Housing Finance Agency ) will enact changes to fees known as loan-level price adjustments (LLPAs) on May 1. These changes will affect mortgages originating at mortgage lenders throughout the nation as well as U.S. territories, effectively tweaking interest rates paid by the vast majority of homebuyers.
The amazing thing is, if you have good credit, your fee will go up and if you have bad credit, your fee will go down.
The result is confusing and many loan officers and staff in the industry are confused even to this day of how it will affect homebuyers. However according to industry professionals, it will create pricier monthly mortgage payments and hidden fees (or taxes) for most homebuyers.
This is an ugly surprise for those who worked for years to build their credit, only to face higher costs than they expected as part of a housing affordability push by FHFA.
“It’s going to be a challenge trying to explain to somebody that says, ‘I worked my whole life for great credit. Further, I’ve put a lot of money down and you’re telling me that’s a negative now?’ That’s a hard conversation to have,” said David Stevens who served as Federal Housing Administration commissioner during the Obama administration.
“It’s unprecedented,” he said!
As stated directly on David’s LinkedIn page: In an effort to improve pricing for lower FICO – High LTV purchase borrowers FHFA has created a cross subsidy methodology whereby they raise the costs on better credit quality borrowers to help create this subsidy to lesser credit worthy ones.
Under the new rules, high-credit buyers with scores ranging from 680 to above 780 will see a potentially sizable increase in their mortgage costs – with applicants who place 15% to 20% down payment experiencing the biggest increase in fees.
“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, who is also the former CEO of the Mortgage Bankers Association.
Now stay with me as this gets complicated, just as the government wants it. 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. I saw stuff that was like this, but not as blatant, when I was in the mortgage industry.
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. This is more than $14,000 over the life of a 30 year loan!
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.
It was stated in The National Mortgage Professional that the Federal Housing Finance Authority has supposedly backed away from a planned May 1 fee hike that faced heavy opposition from independent mortgage brokers.
FHFA Director Sandra L. Thompson announced the hike will be delayed until at least Aug. 1st. The problem is that most mortgage bankers I spoke to say the changes are still going into effect May 1.
Sandra Thompson was sworn in on June 22, 2022 as Director of the Federal Housing Finance Agency (FHFA). Thompson was appointed to head the Agency by President Joe Biden.
When president Biden took office he made an unmitigated promise that no one earning less than $400,000 per year would pay new taxes. Some experts even questioned then whether his sweeping plan could keep that pledge. “I challenge you to find an economist who will say that is even possible,” said William McBride, vice president for federal tax and economic policy at the Tax Foundation.
There are many different types of taxes. Some are direct such as income taxes. Others are indirect such as fees. According to Debt.org, user fees are taxes that are assessed on a wide variety of services, including airline tickets, rental cars, toll roads, utilities, hotel rooms, licenses, financial transactions and many others. Depending upon where someone lives, a cellphone, for example, may have as many as six separate user taxes, running up the monthly bill by as much as 20 percent.
In the case of loan-level price adjustments, these are fees forced onto unsuspecting Americans applying for mortgages that have worked hard, kept their payments up to date and have been dutiful to keep their credit whole.
Let’s be clear here, if you already have a mortgage, you will not be affected. Also, if you have paid off your mortgage, you have no home loan, you will not be affected.
Or at least I should say, you will not be directly affected. These are the same types of policies that went into effect which created the Great Recession of 2008. And while this does not have that type of financial destruction potential, this is exactly the type of thinking that got us there.
Providing a break to people that have not paid their bills on time, have gotten into debt over their head and had a detrimental effect on the economy is not fair. Further, it does nothing to help the economy or the people who are applying for mortgages. There is absolutely no benefit to the person that will make or not make their payment on time due to an adjustment of their interest rate or loan fees. However, it is in fact a penalty for being on time and being financially savvy.
It actually flies in the face of economic common sense as people who don’t pay their loans on time should be scrutinized more with regard to their ability to pay and the past performance of not paying on time. These people should get higher rates and higher fees!
Ultimately, this is a slap in the face of every hard working, credit abiding person who takes out a loan for their own home – one of the American dreams. Retirement and wealth creation which is out of reach for many, but I work to protect yours, is the other.