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04/16/2023 | 4:23 p.m
A little-noticed overhaul of federal rules on mortgage fees will offer homebuyers with riskier credit backgrounds reduced rates — and force homebuyers with better credit to foot the bill, the Post has learned.
Fannie Mae and Freddie Mac will enact fee changes known as Loan-Level Price Adjustments (LLPAs) on May 1 that will affect mortgages originating from private banks across the country from Wells Fargo to JPMorgan Chase, causing the Interest rates paid by the vast majority of homebuyers are effectively adjusted.
The result, according to industry professionals: pricier monthly mortgage payments for most homebuyers — an ugly surprise for those who’ve worked for years to build up their credit only to incur higher costs than they could afford under a US Federal Housing housing affordability initiative had expected Finance Agency.
“It’s going to be a challenge to explain to someone who says, ‘I’ve worked for big loans and invested a lot of money all my life, and you’re telling me now that’s negative?’ It’s a tough conversation,” a concerned Arizona mortgage lender told the Post.
“This is unprecedented,” added David Stevens, who served as commissioner for the Federal Housing Administration during the Obama administration. “My emails are full of mortgage lenders and CEOs [telling] me how incredibly shocked they are by this move.”
The tweaks could further complicate the tedious mortgage application process and put more pressure on a core segment of buyers in a real estate market already in the midst of a major downturn, the experts added. The average 30-year mortgage rate is 6.27% as of last week — up from about 5% a year ago and more than double what it was two years ago, according to data from Freddie Mac.
Under the new rules, high-credit buyers with a score between 680 and above 780 will see their mortgage costs increase – with applicants making a 15% to 20% down payment experiencing the largest increase in fees.
“This was a blatant and significant reduction in fees for their highest-risk borrowers, and a significant increase in buyers with much better credit quality — just telling the world that this move was a fairly significant cross-subsidy pricing change,” Stevens added. who is also a former CEO of the Mortgage Bankers Association.
The LLPA fee changes are effective May 1.AP
LLPAs are prepayments that are based on factors such as a borrower’s creditworthiness and the amount of their down payment. The fees are usually converted into percentage points that change 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 incur a 1% surcharge — a 0.750% increase from the old fee of just 0.250 %.
Incorporated into a long-term mortgage rate, the increase is a little less than a quarter of a percentage point of the mortgage rate. For a $400,000 loan with a 6% mortgage rate, Stevens calculates that this buyer could expect their monthly payments to increase by about $40.
Meanwhile, buyers with a credit score of 679 or below will see reduced fees, resulting in cheaper mortgage rates. For example, a buyer with a 620 FICO credit rating and a deposit of 5% or less will receive a 1.75% fee rebate – a reduction from the old 3.50% fee rate for that class.
Experts say the fee changes will hurt buyers with high credit ratings. Christopher Sadowski
Included in the long-term mortgage rate, this corresponds to a discount of 0.4% to 0.5%.
The LLPA mandated by the FHFA overhaul affects purchase loans, limited cash-out refinancing and cash-out refinancing loans.
The revised pricing matrix also includes the controversial addition of a new fee for buyers with a debt-to-income ratio above 40% — a convoluted measure immediately backed by the Mortgage Bankers Association and other industry groups, which warned it would be difficult to implement was rejected.
After the pushback, the FHFA announced last month that it would delay the introduction of the debt-to-income fee until at least August 1 – a move it said would “ensure a level playing field for all lenders to be able to afford enough.” have time to use the fee.”
The LLPA fee changes are still scheduled to go into effect on May 1st.
Mortgage rates have more than doubled in the last two years. Bloomberg via Getty Images
The fee structure changes are the latest of several actions by the FHFA aimed at improving affordability for what the agency calls “mission borrowers” — defined as first-time buyers, low-income borrowers and applicants from underserved communities.
Last year, the FHFA eliminated upfront fees for first-time buyers who earn at or below 100% of their area’s median income, or 120% in areas deemed “expensive.” The agency also charged upfront fees for second homes and some larger mortgage loans.
“The timing of this is troubling,” Pete Mills, MBA’s senior vice president of residential policy, told The Post. “As we enter the spring homebuying season, homebuyers have been shown to be impacted by last year’s rate hikes. The timing for this is not ideal.”
According to Mills, “most borrowers” should see a modest rate hike as a result of the fee changes.
Asked about concerns the changes could hurt buyers with high credit ratings, an FHFA official told The Post the agency was “charged to ensure.” [Fannie and Freddie] fulfill their role in all market conditions,” adding that changes in long-term mortgage rates are a far larger factor in determining funding conditions in the US housing market.
“The recent pricing framework recalibration announced by the FHFA in January 2023 is minimal in comparison and maintains market stability,” the FHFA official said in a statement.
The US housing market is in the midst of a slump.AP
Fannie and Freddie are government-backed corporations that buy loans from mortgage lenders and either hold them as assets or resell them as mortgage-backed securities. Both have been in federal conservatory since the housing market collapsed during the Great Recession.
The two companies are committed by their charters to increasing access to affordable mortgage loans. They do this in part by using the “cross-subsidization” model, in which some borrowers are charged a little more for loans while others are charged less.
Overall, buyers with lower credit ratings still pay more LLPA fees than buyers with high credit ratings — but recent changes will close the gap.
The official said the LLPA changes would result in an average price increase of just three to four basis points, or 0.03% to 0.04%, across the spectrum of mortgageees — the equivalent of a few dollars a month.
The agency claims the LLPA changes will help preserve Fannie and Freddie’s financial health — a key element of their responsibilities as conservators.
“These upfront payment changes will strengthen the security and soundness of businesses by improving their ability to improve their capital position over time,” FHFA Director Sandra Thompson said in a statement earlier this year.
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