“Home equity” for most Americans is how much of their home they have currently paid off through their mortgage. But a new rule by the Biden administration cites “equitable and sustainable access to homeownership” as the reason to raise mortgage fees on borrowers with good credit, while making it easier for those with bad credit to get a mortgage they can afford. The new rule went into effect May 1.
The rule is an adjustment to the calculation of what is known as the “Loan-Level Pricing Adjustment,” used in any conventional mortgage backed by Fannie Mae and Freddie Mac. “In real terms, it means borrowers with a good credit rating – above 740 – could pay as much as $375 extra in the long run while those with poorer scores – below 639 – stand to save up to $6,000.” Government backed loans (like FHA mortgages), jumbo loans, and other non-conforming loans are not affected.
A recent Bankrate.com analysis put the example this way: “[I]f you have a score of 640 to 659 and borrow 75.01 percent to 80 percent of the home’s value — in other words, make a 20 percent to 25 percent down payment —you now pay a fee equal to 2.25 percent of the loan balance. Before these changes, the same borrower paid a 3 percent fee. On a hypothetical $350,000 loan, that’s a savings of $2,813. A borrower with a higher credit score of 740 to 759 would have paid a fee of 0.5 percent on a loan with an 80 percent loan-to-value (LTV) ratio. Under the new rules, that fee rises to 0.875 percent. On a $350,000 loan, that’s an extra cost of $1,313.
On this episode of The Drill Down, host Eric Eggers is joined by Roger Valdez, director of the non-profit Center for Housing Economics, who recently wrote an article about this rule change for the Washington Times. Their conversation sheds a lot of light on the problems with this new policy, and why it has come under such withering criticism.
Roger explains: “Long story short. . . What created the outrage (among the public) is the idea that if your credit score is higher, you will now pay more, and if it’s worse you will pay less.”
“Back in the Trump administration,” Roger continues, “policy makers noted the disparity in home ownership between blacks and whites. Forty-four percent of black people in America own their home, whereas 72% of whites do. Trump’s thinking was, we need to address this,” he said.
According to a Wall Street Journal editorial, the “biggest problem here is fairness. Taxpayers already subsidize mortgages for low-income borrowers through the Federal Housing Administration. Now they want to punish those who have maintained good credit while rewarding those who haven’t.”
Valdez believes the government putting its fingers on the scale in setting these costs differently is that it will prevent free market solutions from accomplishing the same thing without the cost to taxpayers and mortgages with better FICO credit scores. “There are better ways to calculate someone’s credit score by including rent payments and not penalizing those who carry a high credit card balance if they’re paying it consistently,” he notes. “There’s a company called Piñata that works with borrowers to help them build their credit scores by earning rewards for paying down debt. These solutions don’t cost taxpayers a thing and they work,” he said.
The rule change, instead, punishes those with better credit and adds an additional subsidy for those with worse credit. This “may also end up harming other homeowners down the road,” the Wall Street Journal editorial continued. “Many high-risk borrowers brought in under the plan will buy homes in low-income neighborhoods. The working-class families who already live in those neighborhoods worked hard and saved for their homes. If their new neighbors default and face repossession, nearby homeowners may see their property values fall.”