In May 2023, Fannie Mae and Freddie Mac rolled out a new upfront fee structure for mortgages. Some critics have claimed President Joe Biden is helping people with bad credit at the expense of people with good credit. Some call it the Biden Rule — a green light for risky borrowers, and a sign that a new housing crisis is around the corner.
In April, a group of U.S. senators wrote a letter to the director of the Federal Housing Finance Agency (FHFA) to call the new fee structure “a perverse incentive that punishes hardworking Americans for their fiscal prudence.”
When the changes are broken down, a more nuanced picture emerges. Let’s take a look.
What Just Changed?
What changed is something called the loan-level price adjustment (LLPA). The adjustment impacts the charges known as upfront fees.
The fee structure adjustment — which only impacts mortgages with terms longer than 15 years — modifies fees for buyers at closing. These upfront fees are made up of lenders’ expenses, inspections and appraisals, and the home buyer’s earnest money.
The whole thing might have gone largely under the radar, but for an article in the Washington Times with the startling title “Biden to Hike Payments for Good-Credit Buyers to Subsidize High-Risk Mortgages.” The Times said the FHFA’s fee modifications would make buyers with high credit scores “subsidize people with riskier credit ratings who are also in the market to buy houses.”
Some members of Congress quickly made moves to introduce bills to undo the mortgage fee changes. A coalition of state level officials also weighed in, and they’re currently challenging the upfront fee changes. They’ve claimed that the changes are unfair, and that they could create a “disaster” in this time of higher interest rates and a possible looming recession.
Was the White House Involved in These New Fee Changes?
The FHFA made the changes. This federal housing agency announced the changes in January 2023. The changes were not made by Joe Biden.
Yes, the agency’s director is a Biden appointee. Yes, the changes tend to reinforce White House housing policy. Still, the FHFA is an independent federal agency, separate from the White House.
The Federal Housing Finance Agency has consistently laid out its rationale for modifying the mortgage fees it sets. So, we’re able to take a look at both the backstory and the agency’s current reasoning with our readers. Let’s take a look.
Hasn’t the Federal Government Done This Before?
In late October 2022, the Federal Housing Finance Agency did scrap all upfront fees for most U.S. buyers who (a) are categorized as first-time buyers, and (b) have earnings no higher than the area median income. That’s the midpoint income for the local population.
Other people who do not have to pay upfront fees since October are customers for the following loans:
- Fannie Mae’s and Freddie Mac’s popular affordable home loan types, known as HomeReady and Home Possible.
- Mortgages backed by the U.S. Housing Finance Agency, known as HFA Advantage® and HFA PreferredTM loans.
- The FHFA’s single-family Duty to Serve loans.
As an aside, the Duty to Serve loan program is not related to military borrowers. It refers to language in the Housing and Economic Recovery Act of 2008, which says Freddie Mac and Fannie Mae have a “duty to serve” specified categories of real estate buyers who are underserved:
- Manufactured home communities.
- Affordable communities.
- Rural communities.
Supporting the safety and viability of neighborhoods and buyers of modest means is a government responsibility, under federal law.
OK, the Nitty Gritty. Are Borrowers With Good Credit Now Subsidizing Those With Poor Credit?
The government says no, that’s not the case. The fees that now pertain to a spectrum of credit scores are closer to even. People with smaller down payments are paying less in fees. But a high-payer could be paying less, too.
Fees are lowered for borrowers with less money for down payments, not lower credit scores. Yet the new structure does help people with credit scores under 640 buy homes, even if they put less than 5% down. Their fees used to be 3.25% but will now be 1.75%. Even with that lower fee, they still pay the highest fees of all borrowers. According to the FHFA’s director, Sandra Thompson, people with lower credit scores will still pay higher fees than people making the same payment but with higher credit scores.
Plus, everyone who makes a low (under 20%) down payment is paying private mortgage insurance on top of their mortgage principal and interest.
☛ People who pay smaller down payments are still contributing their share to offset risks in the loan system. They have to pay into private mortgage insurance, while people who can put 20% down don’t have to.
In short, the agency explains, borrowers with good credit won’t pay more to help other borrowers pay less. Nor will these fee changes reward anyone for putting less money down. Borrowers who can’t afford down payments pay their way, and insure the risk.
At the End of the Day, What Were the Alternatives?
Some will say the changes don’t go far enough. After all, access to housing is at a crisis point. People in minority groups and those working in a growing gig economy are struggling especially hard to come up with down payments and get loan approvals.
The federal government can’t just ignore this. Accordingly, “equitable access to affordable and sustainable housing” was indeed one of the FHFA’s stated purposes as it adjusted the upfront mortgage fees this year. Yet the agency has taken care to explain that it has not incentivized risky borrowers in the process.
The government has targeted its fees carefully. It has increased fees on people buying second home buyers, or applying for cash-out refinances. This sort of financing, of course, will be the type that people with higher credit scores get, as these people have generally made years of timely payments and built up a lot of value in their real estate. Do these targeted fee increases hurt the market — or help it stay healthier than it otherwise would be?
If you’d like to explore the debate on this question for yourself, and take a deep dive into the fee changes, check out the Supporting References section below.
Supporting References
Dave Boyer for The Washington Times: Biden to Hike Payments for Good-Credit Homebuyers to Subsidize High-Risk Mortgages (Apr. 18, 2023).
Damakant Jayshi for Snopes Media Group Inc. via Snopes.com: Is Biden Raising Mortgage Payments for People with Good Credit? (Apr. 28, 2023).
Michael Lee for Fox News via MSN.com: Biden’s Mortgage Redistribution Plan Sparks Ominous Warning as Experts Note Similarities to Prior Crisis (May 2, 2023).
Jim Parrott and Janneke Ratcliffe for the Urban Institute via Urban.org: Fannie Mae and Freddie Mac’s New Pricing Is Not Punishing Those with Better Credit: Follow the Numbers (Apr. 27, 2023).
Clifford Rossi for HousingWire.com by HW Media, LLC.: Opinion – Setting the Record Straight on Mortgage Pricing (May 1, 2023).
Real Estate In-Depth via RealEstateInDepth.com: FHFA Eliminates Upfront Fees for First-Time Homebuyers (Oct. 25, 2022).
And as linked.
Photo credits: Mikhail Nilov and RDNE Stock Project, via Pexels.