If you believe that the federal government is engaging in a form of wealth redistribution by charging higher mortgage fees to individuals with good credit while benefiting those with bad credit, then you have been misled.
The evidence reveals a different story: Home buyers with high credit scores pay lower mortgage fees compared to buyers with low credit scores. Moreover, larger down payments lead to reduced costs.
The confusion may have arisen due to recent updates in mortgage fees, which sparked debates filled with more opinions than factual information.
The misinformation spread after the Federal Housing Finance Agency (FHFA), a regulatory body, adjusted mortgage-related fees starting from May 1. The changes resulted in lower fees for home buyers with low credit scores, while some buyers with average to high credit scores experienced fee increases.
The FHFA did not provide detailed explanations for the fee changes, leading to demands for supporting evidence from critics. However, the FHFA has yet to provide the requested documentation, leaving room for inaccurate speculation and assumptions.
Critics mainly contended that individuals with excellent credit were being overcharged to subsidize those with poor credit.
On April 21, Tucker Carlson criticized the fee policy on his final episode of Fox News, claiming that people with high credit scores would be burdened with higher fees on their mortgage payments to subsidize those who had not maintained good credit.
Senators Roger Marshall and Thom Tillis expressed similar concerns in an April 26 news release, arguing that the revised fees would penalize responsible Americans who managed their finances well, in order to support high-risk borrowers with low credit scores.
Stacy Garrity, Pennsylvania’s treasurer, also voiced her dissatisfaction in a letter to the FHFA’s director on May 1, stating that individuals who made down payments of 20% or more on their homes would face the highest fees, which she considered a misguided incentive.
However, a closer examination of the numbers reveals that these accusations lack supporting evidence. For instance, Garrity’s letter, endorsed by 34 fiscal officers from 27 states, relied on an error-riddled chart from an article discussing the fee changes.
It is essential to understand the nature of these fees. The FHFA oversees Fannie Mae and Freddie Mac, which establish lending requirements for conventional mortgage loans. These entities charge upfront fees that vary based on the borrower’s credit score and loan-to-value ratio (the percentage of the down payment). Fannie Mae refers to them as loan-level price adjustments, while Freddie Mac calls them credit fees.
These upfront fees serve as a protective measure for Fannie Mae and Freddie Mac, mitigating potential financial losses when borrowers struggle to meet their mortgage payments. Fees are higher for borrowers deemed riskier, such as those with lower credit scores or smaller down payments.
To illustrate the impact of credit scores on upfront fees, let’s consider three individuals purchasing houses. Each buyer makes a 20% down payment and borrows $300,000. The only difference is their credit score. One buyer has a credit score of 796 (among the top 10% according to the Urban Institute), another has a score of 734 (in the middle), and the third has a score of 644 (among the bottom 10%):
- The buyer with a credit score of 796 will be charged $1,125 in upfront fees.
- The buyer with a credit score of 734 will pay $3,750.
- The buyer with a credit score of 644 will pay $6,750.
Hence, the notion that individuals with high credit scores face higher fees is unfounded. Upfront fees increase as credit scores decrease.
It’s worth noting that borrowers are unlikely to find these fees explicitly listed in their loan documents. Instead, lenders pass on the cost through slightly higher interest rates and potentially adjusted origination fees. In the case of the three hypothetical buyers mentioned earlier, the lender might raise the interest rate by 0.125 percentage points for the buyer with a credit score of 796, by a quarter of a percentage point for the buyer with a credit score of 734, and by half a percentage point for the buyer with a credit score of 644, alongside fee adjustments.
When factoring in private mortgage insurance (PMI), buyers making larger down payments end up paying less than those with smaller down payments. Let’s compare two borrowers with credit scores of 734, each borrowing $300,000 but making different down payments (less than 20%):
- The buyer with a 15% down payment pays a total of $7,200 in upfront fees, along with 60 monthly PMI premiums.
- The buyer with a 9% down payment pays a total of $12,525 in upfront fees and PMI premiums.
Meanwhile, a buyer with a 20% down payment pays a $3,750 upfront fee and avoids mortgage insurance altogether. It’s important to note that although the upfront fee is lower for the 9% down payment compared to the 15% down payment, the mortgage insurance premiums are significantly higher. Any fee comparison that disregards PMI costs provides an incomplete picture.
Another valid complaint from critics is that many home buyers will face higher fees compared to the previous fee schedule before May 1. The most affected buyers are those with credit scores ranging from 680 to 779, making down payments between 5% and 25%. According to Attom Data Solutions, a property data provider, the median down payment in Q3 2022 was 9%.
For example, a buyer with a median credit score of 734 and a $300,000 mortgage will experience higher upfront fees under the new fee structure compared to before May 1. The fee increase varies depending on the down payment:
- With a 9% down payment, the upfront fee is $1,125 higher.
- With a 15% down payment, the fee is $2,250 higher.
- With a 20% down payment, it’s $1,500 higher.
FHFA Director Sandra L. Thompson defended the changes, stating in an April 25 statement that the revised fees better align with the expected financial performance and risks associated with the underlying loans. Essentially, the FHFA adjusted the upfront fees to ensure they accurately reflected shifts in borrower outcomes. These fees had not been revamped for eight years.
The primary responsibility of the FHFA is to ensure that Fannie Mae and Freddie Mac do not require another government bailout like the $187.5 billion taxpayer-funded rescue they received following the 2008 financial crisis. The fees imposed on borrowers aim to strengthen these mortgage giants, reducing the likelihood of taxpayers having to recapitalize them during an economic downturn.
However, the FHFA failed to provide supporting data to justify the fee changes, naively assuming that the public would accept their word without question.
While upfront fees increased for many buyers with credit scores of 680 and above, they decreased for buyers with credit scores below 680. This decrease is the cause of concern for Marshall and Tillis, who believe the revised fees favor riskier individuals with low credit scores, while simultaneously burdening those with higher scores.
However, in practice, buyers with low credit scores and small down payments do not experience significant benefits from decreased fees. This is because the Federal Housing Administration (FHA) offers mortgage insurance that is cheaper than private mortgage insurance (PMI) for borrowers with lower credit scores.
Specifically, over the first five years, loans with FHA mortgage insurance are more cost-effective than loans with private mortgage insurance for the following scenarios:
- Buyers with credit scores below 740 who make down payments below 5%.
- Buyers with credit scores below 720 who make down payments below 10%.
- Buyers with credit scores below 700 who make down payments below 15%.
- Buyers with credit scores below 660 who make down payments below 20%.
In conclusion, the facts indicate that home buyers with high credit scores continue to pay lower upfront mortgage fees than buyers with lower credit scores. When considering mortgage insurance, buyers with larger down payments also pay less than those with smaller down payments. The fee changes implemented by the FHFA aim to account for shifts in risk over the years, and upfront fees on conventional mortgages have decreased for buyers who would be better served by FHA loans.
