FHFA Responds to Criticism About Updated LLPA Fee Structure
Written By: Joel Palmer, Op-Ed Writer
A wave of criticism about updated mortgage fees prompted the director of the Federal Housing Finance Agency (FHFA) to issue a lengthy rebuttal last week.
On Monday, May 1, new upfront fees for purchase and rate-term refinance loans went into effect on mortgages secured by Fannie Mae and Freddie Mac. FHFA announced redesigned and recalibrated grids for upfront fees in January 2023. In addition, a new upfront fee for certain borrowers with a debt-to-income (DTI) ratio above 40 percent was announced.
The DTI ratio-based fee was delayed until August 1, but the recalibrated fees went into as scheduled on May 1.
The upfront loan level pricing adjustment (LLPA) structure employed by Fannie Mae and Freddie Mac is a risk-based pricing tool to encourage responsible lending and to protect taxpayers from undue risk.
“Recently, there has been increased focus on changes made by the Federal Housing Finance Agency to the pricing framework of Fannie Mae and Freddie Mac,” said FHFA Director Sandra L. Thompson. “Unfortunately, much of what has been reported advances a fundamental misunderstanding about the fees charged by the enterprises, and why they were updated.”
A number of news organizations reported on the updated fee structure last week ahead of Monday’s implementation date. Many of the headlines stated or implied that FHFA had raised costs for buyers with good credit to subsidize more risky borrowers.
"In the short term, this may increase homeownership among the targeted group, but I'm afraid it could decrease homeownership among the middle class," Jerry Howard, CEO of the National Association of Home Builders, was quoted by Newsweek. "I'm not sure that we're not robbing Peter to pay Paul here.”
David Stevens, who served as Federal Housing Administration commissioner during the Obama administration, told the NY Post: “This was a blatant and significant cut of fees for their highest-risk borrowers and a clear increase in much better credit quality buyers – which just clarified to the world that this move was a pretty significant cross-subsidy pricing change.”
The Post story noted the difference in how the old structure compared to the new structure for both higher-risk and lower-risk borrowers.
Buyers with a FICO credit score of 740 and a 15 percent to 20 percent down payment will now be charged a 1 percent upfront fee. The old fee was 0.25 percent, meaning borrowers with high credit scores and down payments will pay 75 basis points more on the upfront fee.
On the other hand, buyers with a 620 FICO credit score and a down payment of 5 percent had the upfront fee cut in half from 3.5 percent to 1.75 percent.
Thompson noted that low-risk buyers are still paying a lower upfront fee than those in the high-risk category.
In addition to media coverage, the new fee structure has drawn criticism from members of Congress and industry stakeholders.
Last week, the Chairman of the House Financial Services Committee, Patrick McHenry (NC), and the Chairman of the Subcommittee on Housing and Insurance, Warren Davidson (OH), sent a letter to Thompson demanding the agency reverse its decision on the new fee structure.
“These changes violate the fundamental principle of risk-based pricing, namely that lower-risk borrowers should pay lower prices for access to credit than higher-risk borrowers,” the letter stated. “There is no doubt that lenders will pass on the new LLPA costs to borrowers, which will result in higher mortgage rates and reduced access to credit.
Like many in the industry, the National Association of Realtors has called upon FHFA to not only rescind the increased LLPA fees, but to also remove the DTI-ratio-based fee before its August implementation date.
“NAR strongly opposes this fee since DTIs can change during the financing process, making it difficult to underwrite the loans and making it more likely for a borrower to default given the higher DTI that results from the additional fee imposed.”
Thompson’s statement was written to refute many of the criticisms cited. She noted that the agency had not conducted a comprehensive review of the pricing framework prior to launching a review in 2021.
She also stated that higher-credit-score borrowers are not being charged more to subsidize lower credit-score borrowers. “Some updated fees are higher and some are lower, in differing amounts,” she said.
She also refuted the claim that the new framework incentivizes borrowers to make lower down payments to benefit from lower fees, since lower down payments result in higher mortgage insurance premiums.
Lastly, she said the fee changes do not target borrowers with lower credit scores, but are instead designed to help lower income borrowers. Plus, the changes were not designed to stimulate mortgage demand, but are instead meant to fulfill the GSEs’ charters of supporting low and moderate-income borrowers.
“The updated pricing framework will further the safety and soundness of the enterprises, which will help them better achieve their mission,” Thompson said. “They will provide reliable liquidity to the market while also providing more targeted support for creditworthy borrowers limited by income or wealth. And they will do so with a pricing framework that is more accurately aligned to the expected financial performance and risks of the loans they back.”
The Urban Institute also came to FHFA’s defense.
“FHFA is not raising fees on borrowers with good credit to lower them for those with bad credit. It is raising fees on loans there is little reason to discount so that it can better serve those who need the help."
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
