Your Mortgage Fees Will Soon Be Impacted By This Controversial New Scheme

Some will gain, some will lose.

A significant change is coming soon for home buyers.

Beginning May 1, upfront fees for loans guaranteed by Fannie Mae  (FNMA)  and Freddie Mac  (FMCC)  will be adjusted. The changes have to do with a borrower's credit score and downpayment size.

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The adjustments were made by the Federal Housing Finance Agency (FHFA).

In some cases, people with higher credit scores may end up paying more, while those with lower credit scores will pay less.

"These changes are part of the Federal Housing Finance Agency’s broader examination of fees to provide 'equitable and sustainable access to homeownership' and shore up capital at Freddie Mac and Fannie Mae," USA Today reported in a story. 

The changes are a matter of some controversy. 

"I can see both sides," said Hakan Wildcat, mortgage area manager in Kansas for Guardian Mortgage, according to the story.  "Are there going to be people who qualify for a loan but maybe shouldn’t? Maybe, but that’s probably a very small percentage. But I can see at the end of the day, money is money and if you have great credit, why should you be penalized?"

"We're going to have to see it in practice and see how it plays out but overall, the thought process is probably sound and good," he said.

The new fees will affect conventional loans that conform to the standards set by Fannie Mae and Freddie Mac, which guarantee about half of all U.S. mortgages.

The fees will be different depending on the borrower and will be based on their credit scores, downpayments, and other factors.

USA Today provides this example:

If you have a score of 659 and are borrowing 75% of the home’s value, you’ll pay a fee equal to 1.5% of the loan balance. Before these changes, you would have paid a 2.75% fee. On a hypothetical $300,000 loan, that’s a difference of $3,750 in closing costs.

On the other end, if you have a credit score of 740 or higher, you would have paid a 0.25% fee on a loan for 75% of your home value before May 1. After that date, you could pay as much as 0.375%.

The changes came after FHFA eliminated fees for certain borrowers in October 2022. That action helped many more easily afford buying a home.

FHFA Director Sandra Thompson addressed some key points about the changes in an April 25 statement.

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.

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