What's the Deal? Starting May 1st, are folks with higher Credit Scores really paying more in Fees than Less Qualified Borrowers for a Mortgage?

Let me start off by saying, shame on the mainstream media for creating articles that don't correctly explain what Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) implemented this week. Is our Federal Governement really playing Robin Hood, and stealing from the rich and giving to the poor? Should I skip my next 2 car payments to hurt my credit, so I get a better rate and pay less on my mortgage?

Outlets like CBSnews.com (https://www.cbsnews.com/boston/news/mortgage-fee-changes-good-high-credit-scores), the Boston Globe /(https://www.bostonglobe.com/2023/04/26/opinion/your-credit-score-is-excellent-so-prepare-be-penalized/), ABCnews.com (https://abcnews.go.com/Business/credit-score-home-mortgage-costs/story?id=98868025), FoxNews.com (https://www.foxnews.com/us/biden-rule-redistribute-high-risk-loan-costs-homeowners-good-credit) aren't explaining what just happened correctly.

Perhaps its a rush to get eyes on content, or the first to report on something that is trending in the public eye. More eyes means more ad revenue. Quite frankly though, many of outlets (not just the ones listed here) should have more journalistic integrity - than to cause a panic to my phone line and email this week (Ricky, Frank, Selena, Traci, and others - don't worry - I got you! :-).

First and Foremost: My credit score is 800, am I really paying a higher fee than someone with a 620 Credit Score now?

Answer: No

So why is the media reporting on this?

Because something did happen, and it did start May 1st, but they only have about 50% of the facts and the math correct.

WARNING: Get your nerd goggles on - because we'll be talking numbers and something called "Loan Level Price Adjustments" (LLPA's). LLPA's have been in affect since April of 2008. This isn't a Democrat or Republican thing. They came about when George W. Bush was in office and have fluctuated up and down ever since.

The idea behind it, is that if Government owned subsidiaries are going to own personal mortgages (like Fannie Mae and Freddie Mac do), they need to create a system by which there is an insurance policy in case of default on mortgages. The reason? They don't want the taxpayer to pick up the tab in case you default on your mortgage. So if you own a house, in essence the LLPA is an upfront tax that is 'baked' into your mortgage rate. The tax is NOT a fee paid at closing. It is and always will be a part of your 15, 20, or 30 year conventional mortgage rate. It's no different than the federal tax that you don't even realize you pay when you fill up your car with gasoline. A portion of that amount per gallon goes straight to the Federal Government to help pay for roads (and subsidizing big oil, but I'll save that to talk about for another day). The more you drive the more you pay. Same in this case, the more you borrow, the more you pay.

I think we all agree that most major metro areas have a housing crisis. Rent is getting higher. Part of the reason that Fannie Mae and Freddie Mac exist is to help create an environment where folks follow common rules to qualify for a mortgage. The rich and the not so rich have to play by the same rules - per Fannie Mae and Freddie Mac. To encourage lenders to loan to folks with lower credit scores, they've told these banks, don't worry - worse case scenario is that as long as its written to our rules - we'll buy that mortgage off your books, so that you can feel comfortable loaning to that person with a 620 credit score just as much as loaning to that 815 credit scored borrower.

All that Fannie Mae and Freddie Mac did starting on May 1st was adjust the CREDIT given to both well qualified borrowers and the PUNISHMENT given to lower qualified borrowers.

If 2 borrowers showed up to a lender with the EXACT same specs. Same income, same liabilities, same job, same down payment, same purchase price, etc. and all that was different was their credit score, a borrower who closed on their house on April 30th with an 800 credit (I am making up a mortgage rate here, so you can simply see this as an example) that was quoted 6.375% at par, starting May 1st would be paying 6.50%. Where a borrower on April 30th with a 700 credit score at 7.25% at par, is now paying 7.125%

As you can see that 800 credit score still has a better rate than the 700 credit score (everything else being equal). The 700 credit score's rate just got a little better, and the 800 credit score just got a little worse.

Changes to LLPA's happen nearly every year. This go around, the media just got wind of it.

Below is a chart that shows the changes to LLPA's via a heat map. Horizontal axis in "Loan to Value", vertical axis Credit Score.

So for example, if you had a 780 Credit Score and put 30% down (70% loan to value) your rate just got better by .25%. Another example, If your credit score is 679, and are putting 30% down, your rate just got better by 0.875%. If your credit score is 745, and you are putting 15% down, your rate got worse by .75%. This ONLY affects rate on new mortgages going forward. Your current rate on your current mortgage does not change.

So there you have it. Not really as exciting as what these media outlets explained, because again - the LLPA's have existed through Bush, Obama, Trump, and now Biden.

If you have further questions, don't be afraid to call, email, or LinkedIn Message me. Thanks for reading!