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Why is there controversy over mortgage fees?

Loan-level pricing adjustments are the government's way of raising prices for so-called "riskier" borrowers without putting a penalty on "safer" ones.
Why is there controversy over mortgage fees?
Posted at 1:28 PM, Jun 04, 2023

In January, the Federal Housing Finance Agency announced a change in the pricing models for new government-backed mortgages.

That change went into effect in May, but not without stirring plenty of controversy.

The policy changes something called "Loan Level Price Adjustments," fees on government-sponsored loans like Fannie Mae or Freddie Mac.

Loan-level pricing adjustments are the government's way of raising prices for so-called "riskier" borrowers without putting a penalty on "safer" ones.

The changes to how these price adjustments LLPA's are calculated may raise fees for homebuyers with higher incomes and credit scores while lowering fees for homebuyers with lower scores.

"A fee of going from .5% to 1% fee on a $400,000 loan, you know, it's not nothing. You know, it's $4,000. So, I certainly understand why there is a little bit of frustration from some people, especially when you take into consideration that right now the housing market is expensive," said Jacob Channel, Senior Economist at Lending Tree.

The policy has been criticized across the aisle, with top financial officers and lawmakers from dozens of states voicing concerns.

The new policy was not a directive from President Biden; there was no executive order or legislation, and as of late May, the President has yet to comment on the change.

In response to inquiries, a White House spokesperson told fact-checking outlet Snopes: "The White House does not direct the actions of independent agencies."

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The agency behind the change, the FHFA, regulates Fannie Mae and Freddie Mac, the semi-governmental organizations that buy most mortgages across the country.

In their original statement, the FHFA wrote that they were "taking another step to ensure equitable and sustainable access to homeownership."

"If you've got a lower credit score and can't afford to put down as much for a down payment, then you probably have less money to dedicate toward things like fees on your mortgage. Whereas on the other end of things, if you've got a really high credit score, you probably earn more money. You probably got more money for a down payment, you put more money for a down payment, then you can probably afford to spend a little bit more on fees," said Channel.

Let's look at what's really changing:

Generally, upfront costs are rising for many homebuyers. For example, for an average $300,000 loan with a 20% down payment, fees were projected to rise by about .04 percentage points. (In other words, about $10 a month.)

But the fee change depends on a lot of specifics beyond your credit score, and that's where things get confusing.

Depending on other factors, home buyers could see the upfront fees rise or fall, even if their credit score is high.

"So, it's not as though there's a flat fee. So, you've got a credit score of 760. That means you're going to pay a 1% fee or something like that. That's not quite how it works, and it will vary depending on factors like your loan-to-value ratio, what your income is, what your credit score is, what your down payment is. The list is pretty long," said Channel.

If you have a higher credit score, you will qualify for a mortgage rate that is lower. So proportionally, the cost of your loan should still end up being lower than a loan for a homebuyer with a low credit score.

SEE MORE: Homebuyers taking a pause with high interest rates, low inventory

And according to the FHFA, buyers with good credit scores are not subsidizing the fees of buyers with lower scores.

In early 2022, the agency announced it would be able to pay for the eliminated fees by raising fees on loans for second homes, vacation homes, and more.

"Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less," said FHFA Director Sandra Thompson via a statement in April.

She called what's being reported a "fundamental misunderstanding" and went on to say, "Updated fees, as was true of the prior fees, generally increase as credit scores decrease."

But some critics have questioned if the new change will have a noticeable effect on this anyway.

"At the end of the day, I have serious doubts that there are very many people who couldn't afford a house that because of this change, can now afford a house. Similarly, I have the same doubts that there are people who could afford a house and now, because of this change, can no longer afford a house," said Channel.

Experts have noted that the Federal Housing Administration may still provide more affordable loans in these types of scenarios.

It guarantees mortgages mostly for first-time homeowners, often with smaller down payments and lower credit scores than what Fannie Mae or Freddie Mac will usually permit.

Home prices across the country remain historically high.

Recent data from real estate website Zillow shows the market is especially grim for entry-level buyers: the least expensive third of all houses rose in cost by nearly 10%.

So, if you're looking to buy soon, that market has largely not changed.

"If you are confused about what your fee may be, ask your lender because they'll be able to tell you specifically what it is as opposed to somebody like me who can just kind of give you generalities," said Channel. "The best thing you can do if you're buying a house right now is the same as it has always been."

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