Housing: New rule prompts criticism borrowers with good credit are being penalized

New pricing for federally guaranteed mortgages has sparked criticism in recent weeks, prompting claims that borrowers with higher credit scores will subsidize those with lower credit through higher fees.

With a new rule, the Federal Housing Finance Agency (FHFA) updated its upfront fees for Fannie Mae and Freddie Mac mortgages, which would raise mortgage fees for some while lowering them for others.

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FHFA Director Sandra Thompson pushed back on criticism of the updates, saying some analyses were based on misconceptions of the changes. 

“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” Thompson said in a statement. 

“Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat,” she added. 

Even so, critics of the recently implemented changes argue these fees will punish responsible borrowers while encouraging others to act irresponsibly amid worsening affordability issues. 

Financial officers in 27 states recently wrote an open letter to the White House asking President Biden to rescind the new rule, saying the fees will make it significantly more expensive for borrowers with good credit to purchase a home. 

“In other words, 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 read. 

Breaking down the new fees

On a conventional 30-year loan of $400,000, the upfront fees could add up to $42 per month for borrowers with a credit score above 780, Freddie Mac data showed. 

Some borrowers with higher credit scores and down payments could see fees increase between 5 and 25 basis points, according to an analysis from the Mortgage Bankers Association.   

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Experts say higher credit scores will still lead to lower payments, and the new pricing adjustments are not penalizing borrowers with good credit. 

“Good credit borrowers are not being offered higher rates than lower credit borrowers. FHFA’s new pricing just means that they are not getting as big of a break on their rate as before,” MBA said. 

Instead, higher credit borrowers might not get as high of a break as before, while the hit on riskier borrowers with lower credit and lower down payments could be smaller. 

“Policymakers explained the change as an effort to level the playing field and improve access to housing for first-time buyers and minorities,” Zillow senior economist Orphe Divounguy told The Hill.   

“With this change, the spread of fees between high and low credit score borrowers isn’t as wide. This is not as big of a change as some are making this out to be,” he added.  

Some criticism has also targeted down payments, specifically arguing FHFA is imposing higher fees are being imposed on more creditworthy applicants so they can undercharge those with risky loans.   

But an analysis from the Urban Institute notes this argument disregards mortgage insurance that borrowers must take out on loans where a down payment does not reach 20 percent.  

How will homebuyers notice the new fees?

Market conditions have been especially difficult for prospective buyers without substantial credit histories. 

Housing affordability has taken major hits in recent years as a nationwide shortage and mortgage rate volatility have pushed buyers to the sidelines.

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Interest rates fluctuated drastically in the latter half of the year as the Federal Reserve aimed to cut inflation by raising interest rates.  

Yet there’s always been an element of cross-subsidization given the way higher and lower credit scores are bucketed, Redfin chief economist Daryl Fairweather told The Hill.  

“If you’re in the 700 to 800 range, you’ll get the same mortgage rate, whether you’re at 700, or you’re at 800. So in that scenario, the 800s are cross-subsidizing 700s. It’s just that they change the formula,” Fairweather said.   

MBA noted that given the time it takes to close on a mortgage, the new framework has been in place since March. 

And Fairweather added that, without an announcement, market conditions may have helped the change go unnoticed. 

“[N]o one’s going to notice it because there’s so much mortgage rate volatility right now, anyway. You wouldn’t even know if there wasn’t this announcement, she continued. “I think the big announcement was made to make it seem like it’s a big deal — that they’re doing this redistribution. But in effect, I don’t think anyone’s going to notice.”