An Epic Fail in the Making?

INDUSTRY EXPERTS ARE WARY THAT THE FHFA’S NEW LOAN LEVEL PRICE ADJUSTMENTS WILL DO LITTLE TO AID THE HOUSING AFFORDABILITY CRISIS

By SARAH WOLAK, STAFF WRITER, MORTGAGE BANKER MAGAZINE

Tinkering with credit score brackets and loan level price adjustments to move a few dollars around may not change homeownership rates, or at least that’s the concern of many mortgage professionals. They’re calling upcoming Federal Housing Finance Authority (FHFA) changes a potential epic fail.

The FHFA announced plans last year to make the homebuying process easier – and more accessible – for those with low credit scores, certain first-time homebuyers, low-income borrowers, and underserved communities. The plans largely follow the FHFA’s promise to eliminate fees or match fees for borrowers struggling to purchase homes. The new fee matrices imposed by both Fannie Mae and Freddie Mac consist of three base grids by loan purpose for purchase, rate-term refinance, and cash-out refinance loans— which the FHFA recalibrated to new credit score and loan-to-value ratio categories. According to Fannie and Freddie enterprises, the new loan and credit score thresholds will go into action on May 1. But the new fee guidelines have industry veterans worried about just how effective the LLPAs will be, and whether the changes are punishing high-credit borrowers.

Fannie Mae explained that the adjustments are designed to ease the financial burden off of low-income buyers and buyers with credit troubles. “We partially offset these price reductions with increased pricing for cash-out refinance loans, second-home loans and high-balance loans for higher-income borrowers,” said a Fannie Mae spokesperson. No one was made available to discuss these changes on the record.

With A Grain Of Salt

Brad Cahoone isn’t convinced that the new plans are fair. Cahoone is the CEO and a mortgage broker at Lewisville, Texas-based Global Home Finance. “The new plans are being advertised as a solution to affordability,” Cahoone said. “[They’re] trying to get people to increase homeownership in lower FICO brackets and get traditionally underserved communities into homes.”

However, Cahoone emphasized that this may not be as inclusive as advertised. “They’ve added new brackets at the high end. It used to be that everyone over [a] 740 [FICO score] got the best price. Now if you have a 760 you get different pricing, and anybody above 780 gets the best pricing,” he said.

Cahoone also went on to say that the new guidelines eliminate the 620-639 credit score bracket.

For lower FICO scores, the changes will be the most noticeable, with improvements between 100-200 basis points improvements on those lower brackets. Cahoone says that equates to 1-2% less in closing costs, or, based on the median home price of last year, an extra $4,000-$8,000 savings. “Those price reductions are gonna mean a lot more affordability so it can be used as a buydown to get a lower rate,” he said.

David Stevens, CEO of Mountain Lake Consulting, is also apprehensive about the new FHFA guidelines for LLPAs. As the former CEO and president of the Mortgage Bankers Association (MBA) and a senior vice president at Freddie Mac, Stevens says that he’s most reserved about the fact that this is Fannie and Freddie’s first attempt at a cross-subsidy pricing strategy. “[This means] better credit quality borrowers are going to get increases in order to subsidize the fee reductions for lesser credit borrowers,” Stevens says. “For example, a person with less than a 640 credit score on a purchase with 5% down is going to see an improvement in the LLPA by 1.75%. Today it’s a 3.5% fee in that specific bracket, but the new implementation will reduce the fee by half. But at the same time, if you’re a 740-760 FICO score with a larger payment like 15-20%, they are adding three-quarters of a point to all those borrowers.”

Stevens also reminded that the new guidelines impose a 40% debt-to-income (DTI) ratio cap. “If your DTI goes above 40% –which is low even compared to the CFPB – it means all of your debts and your mortgage payments can’t exceed 40% of your gross monthly income,” he said. “It’s going to take a lot of those borrowers who [the FHFA] is trying to help and push them out because lower-income borrowers tend to have high DTI.”

WHAT’S THE SOLUTION?

Both Cahoone and Stevens said that the FHFA should focus on promoting affordable housing over the LLPA changes. “I think that right now, [FHFA director] Sandra Thompson is trying to make the GSEs more aggressive,” Stevens said. “No matter what you do to improve pricing for first-time buyers, juicing the price may not solve the problem. [This may be] an altruistic motive to increase the GSEs’ performance.”

Cahoone said that although he believes the FHFA’s true intention is to fight inflation at the core, the LLPA adjustments could price out more buyers. “When you raise the rates so much like [the Fed] did, 3, almost 4%, you cut out about 7% of the homebuying population every quarter-percent the rate is raised for a given house,” he said. “If you raise rates by 3% that’s that 7% number 12 times over.”

Stevens suggests that the FHFA should consider charging a basis point – basis point and a half – to apply to all scores regardless of income. “They can use that money that they create to have a fund to subsidize first-time buyers in the lower census tracts,” he explained. Stevens also added that other government agencies like the FHA have DTIs of 50%. “And most credit analysts will tell you that DTI isn’t a great reflection of performance because a lot of people have side jobs, cash jobs, a roommate, or parents living with them.”

Fannie Mae, on the other hand, suggests that their practices are well adept to solve the housing crisis and aid lower-income borrowers. The same company spokesperson wrote, “In coordination with FHFA, Fannie Mae will continue to review national pricing levels to ensure safety and soundness, support our affordable housing mission, and consistently provide liquidity to the mortgage market.”

Next Steps

On a larger scale, Cahoone and Stevens alluded to inflation needing to be controlled in order for successful – and affordable – homebuying. “Right now, we’re in an endless cycle of mediocrity,” Cahoone said. “The fact of the matter is that wages need to catch up and then, affordable homebuying could become realistic.”

The FHFA declined to directly comment on the new LLPA standards; however, a company spokesperson said that the organization is dedicated to making sure the homebuying playing field is even and accessible for all borrowers. The spokesperson also reiterated that the goal of the new LLPA standards is not only to adjust to last year’s rapid interest rate environment but to also maintain market stability. “I’m worried that the FHFA tinkering with how the GSEs do business [will] risk all sorts of negative outcomes in housing,” Stevens said. “There’s a lot of work to be done, but this unfortunate approach isn’t going to get us anywhere. It’s another way the FHFA is setting a precedent on tinkering with housing finance for the country.”

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Scott L. Luna Partner

sluna@ravdocs.com

469-730-4607

Scott Luna’s practice is focused on real estate law with an emphasis on mortgage document preparation and land title issues. Scott managed a successful multistate highvolume title and document preparation business for over 20 years before joining RAV and is recognized throughout the real estate legal community for his expertise. As a past President of the Oklahoma Land Title Association, Scott’s ongoing involvement in the industry adds to his wealth of title-related knowledge. Scott received his Juris Doctor degree from the University of Tulsa College of Law in 1991 after receiving his Bachelor of Science degree from Texas A&M University. Scott is currently licensed in Texas, Oklahoma, Missouri, Minnesota, Nebraska, and Kentucky.