Mortgages: Rewarding good credit with higher fees?
A new policy from the Biden administration seems to penalize mortgage borrowers with good credit, said Ingrid Jacques in USA Today. Starting May 1, Freddie Mac and Fannie Mae reduced the risk-based fees it charges mortgage borrowers with lower credit scores. It’s a move designed to offer easier access to homeownership for those with limited credit, which is great. “Yet it’s worth questioning who must pay for it.” Because to make up the difference, borrowers with better credit will see their fees go up. For instance, borrowers buying a home at the average U.S. sale price of $515,500 with a credit score of 740 and a 15 percent to 20 percent down payment would see their fees increased by $3,200. “That’s not an insignificant charge, especially one caused by bureaucratic meddling.” What message is President Biden trying to send here?
Not the right one, said Jeff Jacoby in The Boston Globe. Potential homeowners who have “done everything they’re supposed to do” are being greeted with “a tax on responsible behavior.” This is “egregiously unfair”—and risky. By artificially boosting riskier borrowers “for mortgages they can’t afford,” the White House is inviting a repeat of what happened in 2008. The “socialization of risk” flies against every rational economic model, said The Wall Street Journal in an editorial. Fannie’s and Freddie’s loan-level price adjustments, which have been in place since 2008, “have historically been used to compensate the agency for loans with higher risk of default.” The fees are assessed based on credit scores. Those don’t always reflect income; in fact, high-income borrowers can saddle themselves with low scores “by overspending, being flaky on recurring payments, or mishandling high balances.” And now we’re making it easier to sell them houses they can’t pay for.
It’s more complicated than that, said Charlie Wells in Bloomberg. “It’s widely accepted in the industry that the two key drivers of default risk” are equity (the down payment) and credit history. The increases will affect mostly buyers with stronger credit scores and lower down payments. That’s an ordinary way of “recalibrating” risk. And “it’s not the case that every category of person with good credit will pay more.” It still pays to maintain good credit, said Emily Peck in Axios. “Borrowers with better credit and higher down payments still pay lower fees.” And the uproar about the fees from Fannie and Freddie may say more about buyer anxiety over home costs than anything. Risk-based fees have been around for 15 years; in 2021, they raised the cost of a home by 0.56 percentage points. “No one paid much attention to Fannie and Freddie when mortgage rates were low,” but now every bit counts.