Homebuyers with good credit scores will soon encounter a costly surprise: a new federal rule forcing them to pay higher mortgage rates and fees to subsidize people with riskier credit ratings who are also in the market to buy houses.
The fee changes will go into effect May 1 as part of the Federal Housing Finance Agency’s push for affordable housing, and they will affect mortgages originating at private banks across the country. The federally backed home mortgage companies Fannie Mae and Freddie Mac will enact the loan-level price adjustments, or LLPAs.
Mortgage industry specialists say homebuyers with credit scores of 680 or higher will pay, for example, about $40 per month more on a home loan of $400,000. Homebuyers who make down payments of 15% to 20% will get socked with the largest fees.
The new fees will apply only to Americans buying houses or refinancing after May 1.
Lenders and real estate agents say the changes will frustrate homebuyers with high credit scores and homeowners seeking to refinance because the rule punishes them for their relatively strong financial positions.
“The changes do not make sense. Penalizing borrowers with larger down payments and credit scores will not go over well,” Ian Wright, a senior loan officer at Bay Equity Home Loans in the San Francisco Bay Area, told The Washington Times in an email message. “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.”
He said the rule will “cause customer-service issues for lenders and individual loan officers when a consumer won’t understand why their interest rate and fees suddenly changed.”
“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,” Mr. Wright said.
The new fees “will create extreme confusion as we enter the traditional spring home purchase season,” said David Stevens, a former head of the Mortgage Bankers Association who served as commissioner of the Federal Housing Administration during the Obama administration.
“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,” Mr. Stevens wrote in a recent social media post. “To do this at the onset of the spring market is almost offensive to the market, consumers, and lenders.”
The housing market has been hit hard by a series of Federal Reserve interest rate hikes that have driven mortgage rates above 6%, roughly double the level from early 2022. The Fed has raised rates rapidly to bring down inflation, which hit a four-decade high of 9.1% last summer.
“In the wake of a 3-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 Federal Housing Finance Agency earlier this year.
Under the new mortgage financing rules, homebuyers with riskier credit ratings and lower down payments will qualify for better mortgage rates and discounted fees.
Federal Housing Finance Agency Director Sandra Thompson, a Biden appointee, said the fee changes will “increase pricing support for purchase borrowers limited by income or by wealth.” The agency calls the overall fee changes “minimal” and said the moves will ensure market stability.
After a storm of criticism, the agency delayed to Aug. 1 an upfront fee for debt-to-income ratios of 40% or more. The ratio is calculated by dividing the homebuyer’s monthly debt payments by gross income. It’s one of the key measures lenders use to determine whether a mortgage applicant qualifies for a loan.
Ms. Thompson said the postponement will help “to ensure a level playing field for all lenders to have sufficient time to deploy the fee.”
The fee changes are intended to subsidize higher-risk borrowers by imposing “an intentional disruption to traditional risk-based pricing,” Mr. Stevens said.
“Why was this done? The answer is simple, it was to try to narrow the gap in access to credit especially for minority home buyers who often have lower down payments and lower credit scores,” he wrote in a post on LinkedIn. “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 predicted that the Federal Reserve will soon complete its course of tightening its balance sheet and mortgage rates will fall.
“Demand for homes will begin to rise and the same challenges for first-time homebuyers will return,” he said.
Lenders also are worried about the impact of the debt-to-income fee that takes effect in August because homebuyers might feel as if they are in a game of “bait and switch” on their projected borrowing costs.
“When a lender is quoting a borrower, there’s a lot they don’t know yet, such as what the property taxes and insurance payments are per month,” Mr. Wright said. “Changes happen to the mortgage payment and income during escrow, so this will cause frustration to borrowers and lenders for the sudden rate/fee changes. Most of us loan officers will then say let’s ‘eat’ the cost for the borrower to keep them happy (resulting in losses for the lender and loan officer).”
He said the added uncertainty will cause delays “during an already competitive real estate market lacking inventory.”
“For example, due to the low inventory and fierce competition, many buyers must close their transactions in less than 30 days to get their offer accepted,” Mr. Wright said. “The sudden rate changes will cause lenders to ‘re-disclose,’ adding additional days to the transaction. This puts extreme timeline pressure on the buyer and lenders forced to re-underwrite the file for the changes.”
In a letter to Ms. Thompson in February, Mortgage Bankers Association President Bob Broeksmit said 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,” Mr. Broeksmit said.
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