In January 2023, the Federal Housing Finance Agency (FHFA) directed Fannie Mae and Freddie Mac (the GSEs) to change the structure of their upfront fees and the levels of some fees. While these changes will provide more clarity for investors and help some consumers, they could harm other homebuyers.
The GSEs are insurance companies critical to the housing finance system. They allocate most mortgage risk to investors best suited to bear that risk and hold some capital to backstop those investors. To raise capital and maintain a profit, they charge a fee.
Every mortgage financed by the GSEs carries a flat-rate charge that shows up in its interest rate. The GSEs also charge upfront fees, called loan level pricing adjustments or LLPAs, that are tailored to each mortgage’s risk, which may vary by the homeowner’s credit score, down payment or the type of home they buy. LLPAs are often spread over the life of the mortgage since most homebuyers cannot pay them upfront.
Last year, the FHFA made changes to the LLPAs that included higher fees on investor and second-home buyers and, more recently, the elimination of fees on certain first-time buyers and some low- and moderate-income buyers. The January announcement made both structural modifications and changes to the levels of fees for some borrowers.
Historically, the GSEs charged the same fee for borrowers financing a home purchase as those seeking to refinance. Refinances pose more risk to mortgage investors because as rates fall, borrowers who have refinanced once tend to refinance again. The investor then gets their cash back and must reinvest at lower rates. Because of this risk, the investor should demand a higher fee than for purchasers. The FHFA now differentiates its fees for purchasers, standard refinancers and cash-out refinancers. This change should help homebuyers.
The other significant change was the level of fees charged to certain homebuyers. For homebuyers with credit scores less than 680, the LLPAs were reduced. However, homebuyers with down payments of 15% to 25% and credit scores greater than 680 saw their LLPAs increase to the equivalent of 2.5 to 20 basis points added to their mortgage rate. These increases compound the squeeze from three percentage points or 300 basis points jump in rates over the last year and high home prices. In addition, the GSEs have introduced a new fee for all homebuyers with a debt-to-income ratio greater than 40%.
These changes will help some buyers, but may add to the burden of middle-wealth/income buyers. The National Association of REALTORS® (NAR) shared our concerns with the FHFA, which recently announced a delay. NAR hopes the FHFA reevaluates these changes.
For more information, visit https://www.nar.realtor/.
