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Fannie Mae and Freddie Mac’s federal regulator is ordering the mortgage giants to eliminate upfront fees on many purchase loans to help first-time homebuyers of limited means, and also increase fees for most cash-out refinancings early next year.
The revisions to Fannie and Freddie’s pricing framework — which are expected to benefit about one in five homebuyers taking out loans backed by the government-sponsored enterprises — were announced Monday by Federal Housing Finance Agency Director Sandra Thompson.
In a keynote address at the Mortgage Bankers Association’s annual convention in Nashville, Thompson also detailed major revisions to the procedures lenders will be required to use when evaluating borrowers’ creditworthiness.
Lenders doing business with Fannie and Freddie will be required to provide two credit scores — the FICO 10T and VantageScore 4.0 — which are seen as more inclusive, and will replace the Classic FICO score that’s been in use for nearly two decades.
While Thompson said implementation of the new credit score requirements will be a “multiyear” process, FHFA plans put the new fee reductions in place “as soon as possible.”
In addition, as part of ongoing efforts to address appraisal bias, FHFA has made public data derived from more than 47 million appraisals, Thompson said.
In her address, Thompson made it clear that regulators are acutely aware of the impact that rising mortgage rates and home prices have had on housing markets, and are looking for ways to provide relief without putting Fannie and Freddie at risk.
“As I often say, improving access and fostering safety and soundness are twin pillars of our work. It is not a choice between the two. Instead, they can — and do — complement each other,” Thompson said.
‘Targeted’ pricing changes
Federal regulators have instructed Fannie and Freddie to eliminate upfront fees for first-time homebuyers, low-income borrowers, and underserved communities “to promote sustainable and equitable access to affordable housing,” Thompson said.
Upfront fees are to be eliminated for:
- First-time homebuyers at or below 100 percent of area median income (AMI) in most markets, or below 120 percent of AMI in high-cost areas
- Fannie and Freddie’s affordable mortgage programs, HomeReady and Home Possible, which let homebuyers put as little as 3 percent down
- HFA Preferred and HFA Advantage loans, offered by Fannie and Freddie through state housing finance agencies (HFAs)
- Single-family loans supporting the Duty to Serve program in support of manufactured housing and rural housing
Bob Broeksmit, president and CEO of the Mortgage Bankers Association, welcomed each of the initiatives announced by Thompson.
“Given the ongoing affordability challenges facing homebuyers, FHFA’s targeted adjustments to [Fannie and Freddie’s] pricing framework … are well-timed and will improve access to credit for low- and moderate-income households, first-time buyers, and minority buyers,” Broeksmit said in a statement.
Real estate industry trade groups including the MBA and the National Association of Realtors are also pushing for the Department of Housing and Urban Development to lower FHA mortgage insurance premiums to help address affordability challenges.
The upfront fees that Fannie and Freddie charges lenders, sometimes referred to as delivery fees or loan-level price adjustments (LLPAs), can add thousands of dollars in costs that lenders pass along to homebuyers, particularly those with blemished credit making smaller down payments.
Currently, a homebuyer with a credit score of 740 or above purchasing a home with a 20 percent down payment can expect that their lender will be charged an upfront fee of 0.5 percent by Fannie or Freddie. That adds up to nearly $2,200 on a $431,500 loan.
But homebuyers with credit scores below 680 who are buying a home with a 3 percent down payment can expect their lender to be assessed upfront fees of 2.25 percent to 3.75 percent, or $9,700 to $16,200 on a $431,500 loan.
For lenders, one catch of the reduced fees on purchase loans is that FHFA is also ordering Fannie and Freddie to start charging higher fees for most cash-out refis next year. Cash-out refinancings, in which homeowners take cash out of their homes when refinancing, can leave borrowers at greater risk of foreclosure in a downturn, because they have a smaller equity cushion.
Beginning Feb. 1, 2023, FHFA said it plans to update upfront fees for cash-out refinance loans “to reflect a range of pricing changes.” Most homeowners doing cash-out refinances will pay higher upfront fees of up to 1 percentage point, but in some cases fees will be decreased by up to 1 percentage point.
Thompson said the changes are part of a “holistic review” of guarantee fee pricing, and build on fee increases announced in April for second homes and high balance loans.
Rising home prices mean Fannie and Freddie’s baseline conforming loan limit increased by 18 percent this year, to $647,200 in most areas of the country and to nearly $1 million in high cost areas. Another big increase in the conforming loan limit is expected next year, with many big lenders already treating loans of up to $715,000 as conforming.
Even as their loan limits soar, FHFA still expects Fannie and Freddie to help more low-income Americans become homebuyers, and to help lenders address racial homeownership gaps.
Credit score changes
By doing away with the standby Classic FICO score and replacing it with two scores — the FICO 10T and VantageScore 4.0 — FHFA hopes to not only expand access to credit, but improve risk management.
The FHFA maintains that the FICO 10T and VantageScore 4.0 scores are more inclusive, because they can analyze new factors such as rent and utility payments.
“Requiring both credit scores, when available, will result in more borrowers that can be evaluated by [Fannie and Freddie] than a single score alone, which will improve their management of credit risk while also responsibly and sustainably expanding access to credit for borrowers with less robust credit histories,” Thompson said.
The National Consumer Law Center (NCLC) welcomed the move to update Fannie and Freddie’s credit scoring models, which consumer groups have advocated for nearly a decade. In a 2014 letter to FHFA, the NCLC and other consumer groups complained that the Classic FICO score “unfairly limits credit opportunities for many applicants.”
“Moving to the updated credit scoring models will help consumers because both FICO 10T and VantageScore 4.0 do not consider paid debt collection items,” NCLC staff attorney Chi Chi Wu said in a statement. “They also reduce the impact of unpaid medical debt.”
Requiring lenders to obtain both the FICO 10T and VantageScore 4.0 scores will preserve competition, Wu said, because the “big three” credit bureaus (Experian, Equifax, and TransUnion) developed the VantageScore and own the company that provides it.
It’s a big change, and Thompson promised that FHFA will conduct “extensive outreach” as it embarks on a “multi-year implementation phase.”
“We know there will be many questions about these details and the associated timelines, and we are committed to working with stakeholders to ensure a smooth and manageable transition,” Thompson said.
Broeksmit agreed that the proposed changed “should help broaden the scope of eligible borrowers and expand access to homeownership for underserved communities.”
The MBA, he said, “supports competition in the credit scoring space, and we will work with FHFA to ensure costs and the implementation process are monitored to mitigate unintended consequences to lenders and borrowers.”
As part of ongoing efforts to reduce appraisal bias and provide transparency into the home valuation process, the FHFA also announced the release of a huge data file aggregating 47.3 million appraisal records dating back to 2013.
Thompson said the Uniform Appraisal Dataset (UAD) Aggregate Statistics Data File will help the public compare appraisal gaps in minority neighborhoods, and evaluate trends in appraised values at the national, state and local level.
Broeksmit said the MBA has long supported appraisal transparency, and that the data release “will help the industry work together on data collection, with a shared goal of providing more accurate and equitable appraisals for borrowers.”