The New Mortgage Fees of the Biden Administration

On the surface, the recent changes that have increased fees for some new mortgages seem like a bad deal, as the new rules appear to penalize home buyers who have worked hard to maintain high credit scores. 

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In reality, the changes will simply make it easier for more Americans to be able to purchase a home. These changes are part of the Biden administration's plan to broaden consumer access to homeownership. They involve a set of fees that Fannie Mae and Freddie Mac charge to borrowers. 

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It was previously the case that a borrowers with a credit score of 740 and a 15% down payment would have been charged 0.25% in interest. According to the new policy, the fee will rise to 1% after the change. Some borrowers with lower credit ratings will see a fee increase to 1% after the change. For example, an individual with a credit score of 640 and a 15% down payment would be charged 3.25%. The fee will fall to 2.5% after the change. 

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This is a controversial change, that has set off a fierce debate. Critics argue that it penalizes aspiring homeowners who have worked hard to build sterling credit, and that it will expand homeownership at the wrong time as we face a possible economic downturn. The former head of the Federal Housing Finance Agency, Mark Calabria, has said that buyers with weak credit and low down payments are particularly vulnerable to default. It is an analogy to putting someone out in a rubber dinghy during a tsunami to avoid a disaster.

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The housing advocacy groups, however, claim that the new structure will offer a boost to first-time and low-income homebuyers at a time when housing prices remain elevated and mortgage rates are at their highest levels in recent years. According to the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the company is simply recalibrating the pricing structure based on risk.

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GWU School of Business professor Vanessa Perry, who researches mortgages and the housing market, unpacks the pros and cons of the policy below. She has been lightly edited for clarity and length.

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Q. What is the reason for the change in mortgage fees by the FHFA?

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A. I am pleased to inform you that the Federal Housing Finance Administration has taken a number of steps to increase homeownership opportunities for people with low incomes and those who come from historically disadvantaged, traditionally underrepresented backgrounds. In order to achieve this goal, a limited set of levers are available, but one of them is to lower the costs for those who may have poor credit. In my view, the changes have at least attempted to make home loan options less expensive in the conventional market in order to attract these borrowers.

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The cross-subsidies that occur in the background will always be at some level in some form, but that’s more of a conceptual level than what’s really going on here, which is a general adjustment. The FHFA has probably done more of a re-evaluation of the costs associated with bearing those risks than anything else. It would be more accurate to say that all the FHFA has done is look at where the risks are and re-estimate them. 

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It is clear that the FHFA has collected all these data over multiple years and economic cycles over the past 50 years, and that data is the basis for these new prices that are being devised based on the characteristics of loans most likely to lead to default losses.

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Q. As a result of these changes, who will pay more in mortgage fees?

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A. It is not the case that every category of person with good credit will be charged more. People with good credit will typically pay a bit more, but those are mostly those who have a lower down payment. This isn't a direct relationship, and it affects every type of borrower equally. 

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In the industry, equity and credit history are widely accepted as the two key drivers of default risk. While risk-based pricing is complicated, it's a well-established fact that equity is the loan-to-value ratio, or down payment.

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Q. What should buyers do if their fees are adjusted?

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A. If you have a high credit score as well as a low credit score, I would offer the same advice. You need to speak with your lender, and maybe even contact several of them, so that they can offer you as much information as possible about conventional loans as well as Federal Housing Administration loans, including what you would have to pay both upfront and over time.

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These changes have altered the competitive landscape between these two types of mortgages, which has changed the competitive landscape between them. One may actually be more advantageous depending on the household's financial circumstances. It is not as straightforward as it used to be because of these fee changes. Borrowers might end up saving significant amounts of money by switching from one market to another. Therefore, it is very important now to compare them before they start shopping.

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The more the deposit, the lower the fees, however, the more likely it will be for a borrower to pay less. It is also important to remember that there is no silver bullet because there was no blanket increase. Some fees did not change, but others did. The complexity of the situation is what makes it so complex. Generally, having a larger amount of equity upfront is a good thing. However, there are downsides as well. In addition, if that tradeoff does not offer you any financial benefit, there may be other investments that you could make with that money that would potentially have a higher return than putting down that additional amount that works out to be an investment.

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