Starting May 1, 2023, some borrowers will pay more for their mortgages thanks to a new rule from the Federal Housing Finance Agency regarding loan-level price adjustments, or LLPAs.
What’s changing on May 1? New mortgage pricing structure
May 1 is the official implementation date for the FHFA’s new LLPAs, though many lenders have already started using the new pricing.
Any borrower getting a conventional mortgage backed by Fannie Mae or Freddie Mac will be impacted by the changes. Government-backed loans (like FHA mortgages), jumbo loans, and other non-conforming loans aren’t impacted.
Exactly how much you’ll pay under the new pricing structure depends on your credit score and how much you put down.
In many cases, borrowers will be charged higher fees than they previously would have paid. A borrower with a 700 credit score and a 20% down payment previously would have paid an upfront fee equal to 1.25% of the loan amount — $3,750 on a $300,000 loan. Now, their fee has been raised to 1.375%, or a total of $4,125 on a $300,000 loan.
The changes will update the current fee structure on the majority of loans originated by mortgage lenders in the US.
Income redistribution is an abiding value of the Biden Administration, and now it wants to spread that to mortgage lending. A new rule will raise mortgage fees for borrowers with good credit to subsidize higher-risk borrowers.
Under the rule, which goes into effect May 1, home buyers with a good credit score over 680 will pay about $40 more each month on a $400,000 loan, and upward depending on the size of the loan. Those who make down payments of 20% on their homes will pay the highest fees. Those payments will then be used to subsidize higher-risk borrowers through lower fees.
This is the socialization of risk, and it flies against every rational economic model, while encouraging housing market dysfunction and putting taxpayers at risk for higher default rates. The 20% down payment is a financial discipline that encourages buyers to seek homes they can afford, and it gives buyers skin in the borrowing game. No one wants to default on a mortgage when they could lose tens or hundreds of thousands of dollars in equity they’ve built up in their homes.
Federal Housing Finance Agency (FHFA) director Sandra Thompson says the rule will “increase pricing support for purchase borrowers limited by income or by wealth.” The Biden Administration may want more homeownership, but selling people houses they can’t afford has never been a good idea. See the subprime loan collapse of 2008.
The FHFA regulates federal mortgage guarantors Fannie Mae and Freddie Mac, which are backed by taxpayers. The rule is meant to make housing more affordable, but goosing demand for homes at the lower end of the market will drive those prices up more in the short term.
The Biden Administration may also end up harming other homeowners down the road. 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.
Progressives want to reduce the importance of credit scores for mortgages, but such scores are designed to measure comparative risk. The fees in question, which are generally called risk-adjusted guarantee fees, have historically been used to compensate the agency for loans with higher risk of default.
This is not a penalty on low-income borrowers, who can get good credit scores by demonstrating consistent ability to repay debts. High-income borrowers can end up with less stellar credit scores by overspending, being flaky on recurring payments, or mishandling high credit-card balances.
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. In the name of making housing more equal, they are pursuing an inequitable policy.