There has been a surge in online news about an unfair tax on mortgage borrowers with higher credit scores. Some sources have suggested that intentionally lowering one's credit score could lead to a better deal, but this claim is entirely false. Lowering credit scores does not result in better mortgage rates and the attempts to do this by missing mortgage, auto, or credit card payments will absolutely cause you more grief and higher payments in the future.
The controversy stems from changes made to Loan Level Price Adjustments (LLPAs) by Fannie Mae and Freddie Mac. These two organizations guarantee a large percentage of new mortgages, and LLPAs are based on loan features such as credit score and loan-to-value ratio. LLPAs have been adjusted numerous times over the years, with a significant change announced in January 2023.
Despite the news being from January, confusion remains as people do not understand the delivery dates used by Fannie and Freddie. Changes that affect fees and guidelines are typically implemented based on the delivery date, which can occur several weeks or even months after the loan has been closed. Since the new changes go into effect for loans delivered on or after May 1, 2023, many lenders began implementing them weeks or even months ago, particularly for loans where rates are locked for extended periods.
Contrary to popular belief, borrowers with lower credit scores are not receiving a discount, and higher credit borrowers are not paying more. The confusion arises from the perception of change in the fee structure for LLPAs, which results in lower costs for borrowers with lower credit scores and higher costs for those with higher credit scores. However, no scenario exists where someone with lower credit will pay a lower fee than someone with higher credit. Lower credit borrowers will still pay more than higher credit borrowers, but the gap between the two groups will be smaller than before.
The tables below illustrate the differences in LLPAs before and after the changes. While the charts initially seem to indicate that a borrower with a credit score of 640 pays less than someone with a score of 740 - this is misleading. The new structure of LLPAs reveals that a borrower with a score of 640 pays significantly more than someone with a score of 740. For example, using an 80% loan-to-value ratio, the LLPA for a score of 640 is 2.25%, while a score of 740 is only 0.875%, representing a difference of 1.375%. This equates to over $4,000 on a $300,000 mortgage, which is almost half the previous difference.
The changes to LLPAs are part of Fannie and Freddie's mission to promote affordable homeownership. The FHFA, their regulator, states this on their website, FHFA Announces Updates to the Enterprises’ Single-Family Pricing Framework. The tables show that there is more improvement for lower credit scores on purchases, i.e., homeownership, as opposed to refinancing.
Update to original post – May 2, 2023
On May 1st, A coalition of fiscal officers from 27 state governments called President Joe Biden and Federal Housing Finance Agency (FHFA) Director Sandra L. Thompson to jettison the new mortgage fee increases that went into effect today.
In a letter to Biden and Thompson, the fiscal officers declared the new policy a “disaster” and said the fee increases will create new financial burdens for homebuyers with good credit by forcing them to pay more on their monthly mortgage bills.
“The policy will take money away from the people who played by the rules and did things right – including millions of hardworking, middle-class Americans who built a good credit score and saved enough to make a strong down payment,” the letter said. “Incredibly, those who make down payments of 20% or more on their homes will pay the highest fees – one of the most backward incentives imaginable. For decades, Americans have been told that they will be rewarded for saving their money and building a good credit score. This policy turns that time-tested principle upside down.”
The fiscal officers, who are led by Pennsylvania Treasurer Stacy Garrity, acknowledged “a gap in access to credit and that low credit scores are a significant barrier to buying a home,” although they also cited affordable housing assistance programs are available. They also noted the new policy does not to address the historic lows in current housing inventory.
“But the right way to solve that problem is not to use the power of the federal government to penalize hardworking, middle-class American families by confiscating their money and using it as a handout,” they continued. “The right way is to implement policies which will reduce inflation, cut energy costs and bring lower interest rates. Doing so will enable more families to save and improve their credit scores. Increased financial literacy efforts must also be part of the solution.”
The letter ended with the request for “immediate action to end this unconscionable policy.”
Biden has never publicly commented on the mortgage fee increases. Last week, Thompson’s office issued a statement claiming that “much of what has been reported advances a fundamental misunderstanding about the fees charged by the Enterprises, and why they were updated.”
Always know, I am here to help you listen and achieve your goals in buying or selling your home. Please feel free to reach out anytime at (801) 885-2558 or email me at brandonrwood19@gmail.com