In April 2023, talk was spreading of lowered interest rates for risky homebuyers at the expense of increased rates on buyers with high credit scores. Social media was abuzz with posts complaining of “responsible” homebuyers funding “irresponsible” ones, and a White House policy change that would bring about another 2008 housing crisis by allowing underqualified buyers to purchase a home they couldn't actually afford.

The announcements were ripe for politicization with news outlets printing headlines such as “Do You Have a Good Credit Score? Biden Wants to Punish You for It.” (USA Today) and “Biden Raises Costs for Homebuyers with Good Credit to Help Risky Borrowers” (Newsweek).

Media headlines & hype tend to hide or misrepresent the facts behind the story. So we at Flotilla dived into the details so you can understand what’s really going on!

WHAT'S REALLY CHANGING?

What’s changing are called LLPA rates (loan-level price adjustments). These are rates that modify homebuyers’ interest rates based on the riskiness of the borrower such as credit score, down payment amount, purchasing a primary residence vs. a secondary investment or multi-family investment property, and high-balance loans (such as an expensive, luxury home).

The LLPA rate changes only affect conventional home loan buyers, not FHA, VA, USDA, or HUD loans (although all loan types have some sort of risk mitigation built-in).

The Federal Housing Finance Agency (FHFA) along with the two major goverment-sponsored lending institutions, Fannie Mae & Freddie Mac, announced earlier this year that new LLPA rates would go into effect on May 1st, 2023. The rates would increase for some high credit score homebuyers while decreasing for most lower-scoring borrowers.

We put together the chart below that color codes the 2023 rate changes…

https://docs.house.gov/meetings/BA/BA04/20230517/115954/HHRG-118-BA04-Wstate-RatcliffeJ-20230517.pdf

Rate decreases are found across the board for borrowers with credit scores below 680 (with some decreases for scores above 680, as well).

The FHFA’s research from the 2008 housing crisis to 2015 showed that low-scoring buyers were, essentially, being overcharged for the risk they posed due to their loans typically being protected by their required purchase of private mortgage insurance (PMI). The adjustments to decrease low-scoring borrowers’ rates effectively corrects for risk the research shows these buyers did not pose.

Other the other hand, small increases are found in high-scoring homebuyers with a 720 to 740 credit score and medium-high loan-to-value ratio (down payments of 15% to 25%). While rate increases on these high-scoring borrowers may seem unfair, the increases are minimal at only 0.75% at the most.

ARE HIGH-SCORING HOMEBUYERS PAYING MORE THAN LOW-SCORING ONES?

No. Risky borrowers still pay more than low-risk borrowers. In the final LLPA matrix (below) that lenders use to determine fees that buyers pay, a higher credit score always coincides with a lower LLPA rate within the same loan-to-value range.

https://singlefamily.fanniemae.com/media/9391/display

WHAT DO INDUSTRY PROFESSIONALS SAY?

We talked to fellow Oklahoma lenders about whether the uproar & media hype is justified. The consensus is that headlines pitting high-scoring homebuyers against low-scoring ones is an unfair interpretation, and ultimately does more social harm than good.

Lenders agree that that any increases will have minimal effect on high-scoring buyers ability to afford a home purchase.

Conversely, rates seeing the greatest decreases will create little benefit for lower-scoring buyers. In fact, for most homebuyers with the lowest scores and the greatest rate decreases, a conventional home loan will rarely make financial sense in those cases. Instead, those buyers may be best-suited for an FHA loan that could save them hundreds of dollars in monthly mortgage payments compared to the conventional loan they qualify for.

WHAT'S REALLY GOING ON?

Ultimately, what lenders & real estate professionals tend to agree on behind closed doors is that banks are attempting to capture more money now knowing that many homebuyers will inevitably refinance to lower interest rates as rates are expected to go down at some point in the future.

The focus on raising rates on high-scoring borrowers is because that is the demographic that is actually purchasing homes right now, and where the most amount of new loans—at the increased rates—will be generated.

The lowered rates are esentially a useful attempt by the major lending institutions to save face while not affecting their bottom-line. Low-scoring homebuyers will rarely opt for conventional loans even at the decreased rates when an FHA loan will likely make more financial sense for those buyers.

CONCLUSION

When it comes to the news & social media, there is usually more background & data that needs to be researched to understand the true picture. In this case, we don’t believe this is an attempt to unfairly “punish” one demographic to subsidize another one.

Simply put, lending institutions are in the business of making money. The future will undoubtedly see homeowners scrambling to refinance to lower rates, so these institutions are securing their income stream today before rates are lowered.

Consumers should also understand that even the highest LLPA fee increases (0.75%) translate to minimal increases in monthly mortgage payments, and should not dissuade buyers from purchasing a home.

© 2023 Flotilla Holdings, Inc.

Special thanks to Constance Ladd, Kirkpatrick Bank and Keith Ferguson, AMC Mortgage.

SOURCES

• US House of Representatives: Understanding the Impact of Recent Changes to the Federal Housing Finance Agency’s Loan-Level Price Adjustment
• Urban Institute: No, Fannie Mae & Freddie Mac Aren’t Penalizing People with Good Credit to Help People with Bad Credit
• Politifact: New Mortgage Rules Don’t Punish Those with Good Credit to Reward People with Bad Credit
• Fannie Mae: 2023 Loan-Level Price Adjustment Matrices