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Borrowers with High Credit Scores Penalized Under New Federal Mortgage Fee Plan

toast0 3y ago
Seems like this might encourage mortgage originators to hold onto more loans to borrowers with excellent credit rather than sell them to Fannie Mae?
- toomuchtodo 3y ago
  Right, this is good for big banks who can hold the loans on their portfolio (think JPMC) but not great for smaller originators who market to prime borrowers and have to sell to GSEs. Might be nothing, likely to only add $40/month to a prime borrower’s mortgage. It seems like an attempt to expand FHA’s mortgage insurance to Fannie and Freddie paper (with the understanding that these mortgages are not as risky as FHA originations). With all of that said, lack of supply and affordability isn’t going to be fixed with loosening credit requirements and shifting the cost to other borrowers. Build baby build, upzone, and fix zoning, it is the only way. We are millions of housing units short. (family member is in the industry)
- svnt 3y ago
  Or said another way: Fannie Mae has decided to stop over-subsidizing the lowest-risk mortgage buyers.
kasey_junk 3y ago
Fannie/Freddie exist specifically to increase access to mortgages. It doesn’t seem strange to me that they would have rules that help people with lower credit. And given how regressive the mortgage regime is in the states im certainly not outraged by this minor oddity.
2devnull 3y ago
Policy that incentivizes the lower class to be more reckless with their already insurmountable debt levels seems morally dubious. A strange thing to support.
- avmich 3y ago
  Reckless? While still paying bigger rates than their better credit score peers?
  - throwawa14223 3y ago
    Market distortions are not made safe by being smaller than some absolute measure.
- svnt 3y ago
  I think you misspelled “policy that reduces the debt burden of housing for those who can least afford to subsidize well-off others”?
  - geoduck14 3y ago
    >I think you misspelled “policy that reduces the debt burden of housing for those who can least afford to subsidize well-off others”? No. I don't think he did.
- cogitoergofutuo 3y ago
  How would you help “the lower class” in a way that you don’t find to be morally dubious?
  - 2devnull 3y ago
    With respect to housing specifically? I’d be ok with a bunch of different tax policy changes, various policies that encourage housing development, etc... This change in fico value sends a message that will have a very negative impact on those who really need to be encouraged to be better savers, to be more debt averse. If you know many poor people you will understand that they often have pathological issues with their thinking and decisions around debt/credit. Policy that lessens the importance of sound financial decisions will have a negative impact on these groups. They would be much better served by policy reinforcing positive behaviors.
MuffinFlavored 3y ago
> People who make more money "penalized" with higher tax rates How is this any different?
- iamdamian 3y ago
  You seem to be comparing apples and oranges. Credit scores are a reflection of your likelihood of defaulting on a loan, and in debt financing, a fundamental truth is that higher risk = higher reward (in this case, higher fees). That said, I don't have a dog in this fight.
zeruch 3y ago
As someone with great credit, I'm fine with this.
- lsaferite 3y ago
  What about people with good credit but low income? I get that perhaps it's easy to conflate the two, but they aren't always related. Personally, I have no strong opinion either way on the issue.
  - zeruch 3y ago
    That's a fair question, but overall, see my answer to the other person here who responded to me. My position is certainly not perfect, but it's also an assertion of ideological/practical preferences, and definitely doesn't cover the whole picture, just the high level intent of "giving all the advantages to only those who require them them least is a stupid idea" for broad systemic health. There's a lot of variables to unpack and configure in any system, and this is no different.
- local_crmdgeon 3y ago
  As someone with great credit, I'm not. I worked my ass off for this.
  - zeruch 3y ago
    "I worked my ass off for this." So did I. But having come up from very poor/working class, I also know that path was painful and I have enough means to live modestly and view that as a way to not be "screw you, I got mine" to the rest of society. And that's not just an empathy overdose. That's knowing even cynically, that if the overall larger number of people in the society around me who get even marginally improved outcomes makes same said society I choose to reside in likely to be more stable, resilient and less interrupt-driven. That's a system investment instead of just being self-focused to the point of ignoring everything else (the latter eventually leads to 'everything else' imposing its collective will reactively otherwise)
mindslight 3y ago
This is exactly the change you'd expect if "credit scores" aren't as powerful of an indicator as they were thought to be. Given that "credit scores" are mostly based around how someone handles small amounts of short term debt, whereas mortgages are huge amounts of long term debt, this wouldn't be terribly surprising. It's disappointing to see Reason framing this in tired reactionary nonsense, when there's a straightforward explanation.
- searealist 3y ago
  So every bank in the world is irrational? Sounds like you could make a killing by starting a bank and making low interest home loans to people with bad credit scores.
  - mindslight 3y ago
    First, an argument based on the efficient market fallacy isn't particularly interesting. But even so, I don't understand what "rationality" has to do with anything here. In the presence of an overwhelming centralized market maker, the market is going to follow its lead. If this weren't the case, then the headline would be even more fallacious - originating banks would just be selling those loans to someone else besides the government.
    - searealist 3y ago
      I would much rather be correct than to make this interesting for you. You fail to explain how exactly this market maker influences banks to charge higher rates to people with poor credit scores. You also don't address the fact that this is universally how loans work in the modern world, even outside the realm of home loans.
      - mindslight 3y ago
        > I would much rather be correct than to make this interesting for you. Apparently you missed my point - it isn't an either/or. Making an argument with the efficient market fallacy is uninteresting in part because it's most likely wrong. cf the joke about the economist that doesn't pick up a $20 bill laying on the ground, because if it were real money then it would have already been picked up by someone else. > You fail to explain how exactly this market maker influences banks to charge higher rates to people with poor credit scores It's right there in the assumption of the headline. If banks didn't pass on the rates from the governmental market maker(s), then borrowers wouldn't see any changes from this. > You also don't address the fact that this is universally how loans work in the modern world You seem to have been taken in by the highly misleading article, directly demonstrating my original point. It seems that this change is making fees for high credit scores less low, and fees for low credit scores less high. The curve is still a sensible monotonic function, just a slightly different one than before.
olliej 3y ago
Talk about headlines that mislead. This is not “we’re making the fees higher for people with higher credit ratings” (a boomer driven invention from the 80s). This is reducing the overall fee discount people with higher credit ratings, from the article: “ lower-credit buyers will still pay more in LLPA fees than high-credit buyers” So if you really think this is unfair, go and damage your credit rating. That way this particular penalty won’t impact you, because you won’t be getting the reduced discount anyway, and all your other fees will be higher, and your interest rate will be higher. Sounds like a win to me!
malshe 3y ago
I wasn't aware that the fees are a function of credit score. What's the rationale for this?
- olliej 3y ago
  To benefit rich donors. That’s really all there is to it. It’s actually a really great example of how people’s bias regarding fairness and equality works: Here we have a bunch of fees that are discounted if you have a higher credit score. The discount is being reduced. A bunch of people (and this article) are losing their shit over this reduction in discount being unfair because it only impacts people with higher credit scores, despite the entire discount not existing at all for people with lower credit scores. And this is before we factor in the much more substantial impact of worse interest rates, etc (the article talks about how this could cost $480 a year, while ignoring the $2000/year a half percent increase in interest rate costs
  - searealist 3y ago
    Your framing is incredibly odd to me and probably most people. There is no discount. There is only extra cost to cover risk if you have a history of being irresponsible.
    - zem 3y ago
      the fact that you're equating a bad credit score to irresponsibility is the fundamental fallacy underlying most of the arguments in the comments here.
      - searealist 3y ago
        This is the textbook definition of irresponsibility.
      - willcipriano 3y ago
        He didn't even ask if they identify as someone who pays their bills on time. Solvency is a social construct.
tedunangst 3y ago
I guess if you're really upset by the penalty, you can deliberately tank your credit score before applying. What, no takers?
- geoduck14 3y ago
  I just bought a house. I've spent a very long time being responsible and doing the right thing, financially. For me to now go out and deliberatly make a bunch of bad decisions goes against who I am. This policy is out to attack people like me, people who work diligently at handling our finances. I feel bad for poor people. I grew up poor, and I want to help the unfortunate, but this policy doesn't do that - it just rewards people who are unresponsible with money (some of them are actually poor, but some are not).
  - xhkkffbf 3y ago
    This doesn't help the "poor"-- it helps those with bad credit scores. There are some people in both camps, but there are many who are poor who pay their debts on time.
to11mtm 3y ago
> with applicants who place 15% to 20% down payment experiencing the biggest increase in fees…. This is the biggest smell to me. Here's the thing about FHA mortgages compared to conventional; If you don't pay 15-20% down, you can -never- get rid of the Mortgage Insurance Premium (MIP, equiv to PMI on a conventional), short of refinancing to a conventional mortgage. Additionally, MIP is based on the default amortization of the mortgage, not the actual. So paying extra doesn't lower your MIP, short of getting to the point you are paid off early. Frankly, it is just a -bit- of a slap to the face, since for most of my life I have been in a spot where I made -just enough- money to not get all the grants/etc to help with home ownership or student loans, but in keeping up with credit and life circumstances had a very hard time getting a home.
janki28100 3y ago
[dead]

Seems like this might encourage mortgage originators to hold onto more loans to borrowers with excellent credit rather than sell them to Fannie Mae?

toomuchtodo 3y ago
Right, this is good for big banks who can hold the loans on their portfolio (think JPMC) but not great for smaller originators who market to prime borrowers and have to sell to GSEs. Might be nothing, likely to only add $40/month to a prime borrower’s mortgage. It seems like an attempt to expand FHA’s mortgage insurance to Fannie and Freddie paper (with the understanding that these mortgages are not as risky as FHA originations). With all of that said, lack of supply and affordability isn’t going to be fixed with loosening credit requirements and shifting the cost to other borrowers. Build baby build, upzone, and fix zoning, it is the only way. We are millions of housing units short. (family member is in the industry)
svnt 3y ago
Or said another way: Fannie Mae has decided to stop over-subsidizing the lowest-risk mortgage buyers.

kasey_junk 3y ago

Fannie/Freddie exist specifically to increase access to mortgages. It doesn’t seem strange to me that they would have rules that help people with lower credit. And given how regressive the mortgage regime is in the states im certainly not outraged by this minor oddity.

2devnull 3y ago

Policy that incentivizes the lower class to be more reckless with their already insurmountable debt levels seems morally dubious. A strange thing to support.

avmich 3y ago
Reckless? While still paying bigger rates than their better credit score peers?
- throwawa14223 3y ago
  Market distortions are not made safe by being smaller than some absolute measure.
svnt 3y ago
I think you misspelled “policy that reduces the debt burden of housing for those who can least afford to subsidize well-off others”?
- geoduck14 3y ago
  >I think you misspelled “policy that reduces the debt burden of housing for those who can least afford to subsidize well-off others”? No. I don't think he did.
cogitoergofutuo 3y ago
How would you help “the lower class” in a way that you don’t find to be morally dubious?
- 2devnull 3y ago
  With respect to housing specifically? I’d be ok with a bunch of different tax policy changes, various policies that encourage housing development, etc... This change in fico value sends a message that will have a very negative impact on those who really need to be encouraged to be better savers, to be more debt averse. If you know many poor people you will understand that they often have pathological issues with their thinking and decisions around debt/credit. Policy that lessens the importance of sound financial decisions will have a negative impact on these groups. They would be much better served by policy reinforcing positive behaviors.

MuffinFlavored 3y ago

> People who make more money "penalized" with higher tax rates How is this any different?

iamdamian 3y ago
You seem to be comparing apples and oranges. Credit scores are a reflection of your likelihood of defaulting on a loan, and in debt financing, a fundamental truth is that higher risk = higher reward (in this case, higher fees). That said, I don't have a dog in this fight.

zeruch 3y ago

As someone with great credit, I'm fine with this.

lsaferite 3y ago
What about people with good credit but low income? I get that perhaps it's easy to conflate the two, but they aren't always related. Personally, I have no strong opinion either way on the issue.
- zeruch 3y ago
  That's a fair question, but overall, see my answer to the other person here who responded to me. My position is certainly not perfect, but it's also an assertion of ideological/practical preferences, and definitely doesn't cover the whole picture, just the high level intent of "giving all the advantages to only those who require them them least is a stupid idea" for broad systemic health. There's a lot of variables to unpack and configure in any system, and this is no different.
local_crmdgeon 3y ago
As someone with great credit, I'm not. I worked my ass off for this.
- zeruch 3y ago
  "I worked my ass off for this." So did I. But having come up from very poor/working class, I also know that path was painful and I have enough means to live modestly and view that as a way to not be "screw you, I got mine" to the rest of society. And that's not just an empathy overdose. That's knowing even cynically, that if the overall larger number of people in the society around me who get even marginally improved outcomes makes same said society I choose to reside in likely to be more stable, resilient and less interrupt-driven. That's a system investment instead of just being self-focused to the point of ignoring everything else (the latter eventually leads to 'everything else' imposing its collective will reactively otherwise)

mindslight 3y ago

This is exactly the change you'd expect if "credit scores" aren't as powerful of an indicator as they were thought to be. Given that "credit scores" are mostly based around how someone handles small amounts of short term debt, whereas mortgages are huge amounts of long term debt, this wouldn't be terribly surprising. It's disappointing to see Reason framing this in tired reactionary nonsense, when there's a straightforward explanation.

searealist 3y ago
So every bank in the world is irrational? Sounds like you could make a killing by starting a bank and making low interest home loans to people with bad credit scores.
- mindslight 3y ago
  First, an argument based on the efficient market fallacy isn't particularly interesting. But even so, I don't understand what "rationality" has to do with anything here. In the presence of an overwhelming centralized market maker, the market is going to follow its lead. If this weren't the case, then the headline would be even more fallacious - originating banks would just be selling those loans to someone else besides the government.
  - searealist 3y ago
    I would much rather be correct than to make this interesting for you. You fail to explain how exactly this market maker influences banks to charge higher rates to people with poor credit scores. You also don't address the fact that this is universally how loans work in the modern world, even outside the realm of home loans.
    - mindslight 3y ago
      > I would much rather be correct than to make this interesting for you. Apparently you missed my point - it isn't an either/or. Making an argument with the efficient market fallacy is uninteresting in part because it's most likely wrong. cf the joke about the economist that doesn't pick up a $20 bill laying on the ground, because if it were real money then it would have already been picked up by someone else. > You fail to explain how exactly this market maker influences banks to charge higher rates to people with poor credit scores It's right there in the assumption of the headline. If banks didn't pass on the rates from the governmental market maker(s), then borrowers wouldn't see any changes from this. > You also don't address the fact that this is universally how loans work in the modern world You seem to have been taken in by the highly misleading article, directly demonstrating my original point. It seems that this change is making fees for high credit scores less low, and fees for low credit scores less high. The curve is still a sensible monotonic function, just a slightly different one than before.

olliej 3y ago

Talk about headlines that mislead. This is not “we’re making the fees higher for people with higher credit ratings” (a boomer driven invention from the 80s). This is reducing the overall fee discount people with higher credit ratings, from the article: “ lower-credit buyers will still pay more in LLPA fees than high-credit buyers” So if you really think this is unfair, go and damage your credit rating. That way this particular penalty won’t impact you, because you won’t be getting the reduced discount anyway, and all your other fees will be higher, and your interest rate will be higher. Sounds like a win to me!

malshe 3y ago

I wasn't aware that the fees are a function of credit score. What's the rationale for this?

olliej 3y ago
To benefit rich donors. That’s really all there is to it. It’s actually a really great example of how people’s bias regarding fairness and equality works: Here we have a bunch of fees that are discounted if you have a higher credit score. The discount is being reduced. A bunch of people (and this article) are losing their shit over this reduction in discount being unfair because it only impacts people with higher credit scores, despite the entire discount not existing at all for people with lower credit scores. And this is before we factor in the much more substantial impact of worse interest rates, etc (the article talks about how this could cost $480 a year, while ignoring the $2000/year a half percent increase in interest rate costs
- searealist 3y ago
  Your framing is incredibly odd to me and probably most people. There is no discount. There is only extra cost to cover risk if you have a history of being irresponsible.
  - zem 3y ago
    the fact that you're equating a bad credit score to irresponsibility is the fundamental fallacy underlying most of the arguments in the comments here.
    - searealist 3y ago
      This is the textbook definition of irresponsibility.
    - willcipriano 3y ago
      He didn't even ask if they identify as someone who pays their bills on time. Solvency is a social construct.

tedunangst 3y ago

I guess if you're really upset by the penalty, you can deliberately tank your credit score before applying. What, no takers?

geoduck14 3y ago
I just bought a house. I've spent a very long time being responsible and doing the right thing, financially. For me to now go out and deliberatly make a bunch of bad decisions goes against who I am. This policy is out to attack people like me, people who work diligently at handling our finances. I feel bad for poor people. I grew up poor, and I want to help the unfortunate, but this policy doesn't do that - it just rewards people who are unresponsible with money (some of them are actually poor, but some are not).
- xhkkffbf 3y ago
  This doesn't help the "poor"-- it helps those with bad credit scores. There are some people in both camps, but there are many who are poor who pay their debts on time.

to11mtm 3y ago

> with applicants who place 15% to 20% down payment experiencing the biggest increase in fees…. This is the biggest smell to me. Here's the thing about FHA mortgages compared to conventional; If you don't pay 15-20% down, you can -never- get rid of the Mortgage Insurance Premium (MIP, equiv to PMI on a conventional), short of refinancing to a conventional mortgage. Additionally, MIP is based on the default amortization of the mortgage, not the actual. So paying extra doesn't lower your MIP, short of getting to the point you are paid off early. Frankly, it is just a -bit- of a slap to the face, since for most of my life I have been in a spot where I made -just enough- money to not get all the grants/etc to help with home ownership or student loans, but in keeping up with credit and life circumstances had a very hard time getting a home.

janki28100 3y ago

[dead]