REAL ESTATE NEWS — Starting May 1 (a socialist holiday), changes in the mortgage industry will affect loans backed by Fannie Mae and Freddie Mac. These changes are part of a broader government effort to provide more equitable access to homeownership and support Freddie Mac and Fannie Mae, which have been under federal conservatorship since the 2008 mortgage crisis. Unfortunately, “equitable” lately appears to be synonymous with “socialist,” a failed philosophy that generally ignores the highest economic law of supply and demand, while institutionalizing tyranny.
The changes involve adjusting mortgage fees up or down in a new government matrix, adversely impacting borrowers with high credit scores. The updates aim to reduce fees for homebuyers with bad credit, narrowing the gap between prospective homebuyers with good and bad credit. While some borrowers with credit scores above 700 may see fees increase by 0.125% to 0.75% depending on their down payment size, they will still pay less than borrowers with worse credit, though still more than they should pay according to the demand curve.
The fee structure, detailed in Fannie Mae’s Loan-Level Price Adjustment Matrix, follows the FHFA’s October 2022 move to eliminate fees for some first-time homebuyers. Upfront fees were eliminated for first-time homebuyers at or below 100% of the area median income (AMI) in most areas and below 120% of AMI in high-cost areas.
Homeownership in the US has increased over the past decade, but not everyone has access to affordable housing, with some lower-income families traditionally facing significant challenges. The FHFA’s updated housing finance plans aim to address these disparities.
The changes have attracted criticism from conservatives, libertarians and economists. Sixteen Republican US senators wrote a letter to FHFA Director Sandra Thompson, arguing that the new fee structure sets a dangerous precedent and demonstrates a misunderstanding of the necessity of accurately tailoring housing finance products to credit risk. Many are concerned that the new fee structure encourages another 2008 type of financial crisis sparked by sub-prime loans.
Some commentators and media outlets have criticized these changes, claiming they penalize borrowers with excellent credit scores. The changes are meant to create a more equitable mortgage environment, and the impacts vary depending on individual circumstances. Unfortunately, there has been no cost benefit analysis, so the end results will not be of much help to those with lower credit scores. A sinking tide lowers all ships. Reduced efficiency negatively affects everyone, especially the vulnerable. A sinking economy sinks the struggling and middle class.
The new socialist framework changes upfront fees that homebuyers pay when they close on a property, which are based on borrowers’ risk characteristics, such as credit scores. Because these federal programs have already taken over a large percentage of loans, most borrowers will be affected. Under the new rule, some people with higher credit scores will pay more in fees, while those with lower credit scores will pay less. While Biden administration claims to not directly be responsible for these changes, the administration is ultimately responsible for enacting or authorizing this administrative change by bureaucracy that controls Fannie Mae. Biden has not publicly commented on the change.
Some critics argue that the new framework penalizes borrowers with good credit to subsidize those with poor credit. However, housing experts from the Urban Institute point out that borrowers who put down less than 20% must purchase mortgage insurance, which moves some risk from Fannie Mae and Freddie Mac to a private mortgage insurer. This allows the government-sponsored enterprises to charge a lower loan-level price adjustment (LLPA) while the borrower pays a fee for the mortgage insurance.
The changes to the pricing framework were not designed to stimulate mortgage demand.
The new plan makes it easier for those with poorer credit scores (639 or below) to buy homes, even with a down payment of 5% or lower. While home ownership improves the financial future for most, a distorted enticement causes some to live beyond their means, and to incur too much debt — a real disaster when the economy sours. Thus, this Mayday mortgage madness is likely to turn into “MAYDAY, MAYDAY, MADAY” distress call by some of the same people whom it claims to help.
The Federal Housing Finance Agency (FHFA) announced the new fee structure applicable to home loans with terms greater than 15 years. This means that home buyers with excellent credit can still get properly rewarded with lower fees by obtaining a 15 year instead of the more common 30 year loan.
The changes aim to provide equitable access to affordable and sustainable housing to people from various backgrounds. The problem is that the system is already too Soviet in nature, inhibiting selection of financing companies, eliminating flexibility, and massively driving up home prices. Making matters worse, the new fee kicks the mortgage and real estate industries while they are already down.
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