The US government’s plan to make homeownership more accessible
Images: Boston Herald | Seeking Alpha
By the next time you read The DONUT, a majority of new US mortgage loans will be recalculated to carry higher fees for borrowers with good credit, as well as lower fees for borrowers with poor credit. This is due to new laws for Fannie Mae and Freddie Mac that come into effect on May 1 (Monday).
☝️ First things first: Fannie Mae (est. 1938) and Freddie Mac (est. 1970) were both created by Congress with the stated goals of providing liquidity, stability, and affordability to the US mortgage market. The two companies are technically shareholder-owned, but have been run by the federal government since the 2007-09 recession.
- Neither Fannie Mae nor Freddie Mac offers mortgages directly to US consumers. Instead, they achieve their stated goals by buying and guaranteeing mortgages on the secondary market that were initially issued by other lenders (typically banks and credit unions).
- And because these lenders want to sell to Fannie and Freddie, they end up structuring their mortgages to align with the two companies’ standards. In recent years, more than 95% of all new US mortgage loans conformed to criteria established by Fannie Mae and Freddie Mac, which collectively own about half of the entire ~$11 trillion domestic mortgage market.
🤔 So, what are the new changes?... Starting on Monday, Fannie Mae and Freddie Mac are altering their standards to increase upfront fees for borrowers with good credit (680 FICO score or above), as well as decrease fees for borrowers with poor credit (679 or below).
For example:
- A buyer with a credit score of 740 who makes a 20% down payment on a home would see their fee climb from 0.5% to 0.875% of the overall purchase price.
- Another buyer who has a 640 credit score and is also making a 20% down payment would see their fee drop from 3% to 2.25% of the home’s purchase price.
📝 Bottom line: According to the federal agency that oversees Fannie Mae and Freddie Mac – which is run by an appointee of President Biden – these changes are aimed at “facilitating equitable and sustainable access to homeownership" by making homes more affordable for lower-income Americans.
📊 Flash poll: How do you feel about Fannie Mae and Freddie Mac’s upcoming changes to the way its mortgage fees are calculated?
See a 360° view of what media pundits are saying →
Sprinkles from the Left
- Some commentators argue that many borrowers in higher credit-score tiers, as well as those making larger down payments, actually will pay less under the new framework than under the prior framework – which represents the opposite of “socializing risk,” as some critics frame the move.
- Others contend that the moves will increase the financial stability and safety of Fannie Mae and Freddie Mac, which will end up benefitting all American taxpayers.
- “FHFA Responds on New Mortgage-Fee Rule” –Sandra L. Thompson, Director of the Federal Housing Finance Agency
- “New Mortgage Fee Rules Are Coming, But What You’ve Heard About Them Is Probably Wrong” –Natalie Campisi, Forbes
- “New LLPA changes represent noble effort, but wrong approach” –David Stevens, HousingWire
Sprinkles from the Right
- Some commentators argue that the federal government’s new mortgage policy flies against every rational economic model by encouraging housing market dysfunction and putting taxpayers at risk for higher default rates.
- Others contend that the new government policy for mortgage rates reduces the incentive for Americans to be responsible and build up a higher credit score, and unfairly penalizes people who did everything correctly by the book.
- “Upside Down Mortgage Policy” –WSJ Editorial Board
- “How to Make the Housing Market Worse” –National Review Editorial Board
- “Housing proposal would punish those with good credit” –Las Vegas Journal-Review Editorial Board
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