North Carolina U.S. Sens. Ted Budd and Thom Tillis are among a group of 15 Republican Senators who recently introduced legislation that would repeal changes the Biden Administration made that could negatively impact some home buyers.
In May, the Biden Administration changed the Loan-Level Price Adjustment (LLPA), a risk-based fee assessed to mortgage borrowers using a conventional mortgage. It is designed to reduce the level of risk exposure for Fannie Mae and Freddie Mac. The fee is generally higher for people with low credit scores or small down payments.
The administration made the changes under the guise that it would help those with low credit scores gain easier access to a loan or, as the Federal Housing Finance Agency (FHFA) says, give “equitable and sustainable access to homeownership.”
The Middle-Class Borrower Protection Act would reverse the changes the Biden administration made.
The bill was led by Senators Mike Braun, IN, and Roger Marshall, KS. Joining them, in addition to Budd and Tillis, was Kevin Cramer, ND; John Thune, SD; Cindy Hyde-Smith, MS; Jerry Moran, KS; Tom Cotton, AR; John Cornyn, TX; John Barrasso, WY; Roger Wicker, MS; Marco Rubio, FL; and Ted Cruz, TX.
“We need to stop President Biden’s reckless proposal to social engineer the housing market by forcing homeowners to subsidize other Americans who are considered high-risk borrowers,” said Tillis in a press release. “I’m proud to join my colleagues in the effort to overturn this egregiously unfair rule.”
Budd said in a statement, “The Biden Administration continues to double-down on misguided policies that only make life more difficult for the majority of hard-working Americans. We should not be punishing fiscally responsible home buyers in order to bail out those with poor credit. This rule is fundamentally unfair and must be overturned.”
Congressman Warren Davidson, R-OH, introduced the companion legislation in May, which passed the House of Representatives with bipartisan support.
Even though the change was introduced in May, those like Stephen Miglarese, loan officer with Movement Mortgage, Raleigh, said they knew about the changes since January. He told Carolina Journal in a phone interview that lenders have been preparing since then. There was a lot of “noise about it in May” because it impacted the lenders a lot and it doesn’t benefit the buyers. “The benefits don’t outweigh the cost,” he said. He explains more about the change in a video he initially released to his mortgage team:
Miglarese said the change isn’t a new tax or fee on those who have a better credit score and put down a higher down payment on a home but is a tweak of an existing fee structure in favor of those with lower credit scores at the expense of those with higher credit scores as the article by Mortgagenewsdaily.com (an article he shared with CJ) states. So, a low-credit borrower isn’t paying less than a high-credit borrower, but the gap between what they pay is just smaller than it was.
In other words, the rhetoric was changed from risk-based pricing to mission-based pricing or promoting affordable home ownership.
But Miglarese said the target group that the government was trying to help, those with lower credit scores, aren’t even taking the help because they are going somewhere else, like an FHA, USDA, or VA loan, which were unaffected by the change.
“It’s only conventional loans, and a lot of times the conventional loans are not the first-time home buyers because they require down payments,” he said, “They’re not the lower end of the credit spectrum because it’s market pricing. There are no subsidies, so you’re paying the price of low credit through your mortgage insurance or through the interest rate more so than you are in an FHA program, so it definitely affected the people who are not taking advantage of government-guaranteed loans.”
Miglarese said it most likely includes those who put a 15 to 25% down payment on a house or those who used to see the best pricing before the change.
In addition to changing the percentages being charged for different credit scores, he said they also opened up two additional credit windows. Previously, it was 740 and above, and you got the same price. Now 740 to 760 is one, and 760 to 780 is another.
“That has been the biggest place where the high credit score buyers are feeling the pinch because a 775 used to be where you got the best pricing,” Miglarese said. “Now you’re getting a loan level price adjuster up 25 basis points to either the cost of the rate or the rate itself.”
The change has disincentivized those who want to put a significant down payment on a home and be less in debt, benefitting the borrower by paying less interest on a 30-year loan.
“It is not in my opinion, unrelated, that there are 40-year mortgage modifications happening simultaneously with incentivizing, less perhaps wise monetary policy in the way people buy mortgages,” Miglarese stated. “We’re just getting more and more comfortable with debt as a society, and that will end up costing people more and more.”
So, who are the winners of the change? Fannie Mae and Freddie Mac, a.k.a. the federal government, have benefited more from the change than anyone else. The reason? Miglarese said it is because very well-qualified conventional buyers are now going with FHA loans because they aren’t getting dinged with the low-level price adjusters. More FHA loans mean more business for the federal government.
If he were asked about a better solution to the issue of affordable home ownership, Miglarese said he would have kept a lot of the original loan level price adjusters for those with bigger down payments and reduced the penalty of many with lower credit scores. So, he agrees somewhat with easing the penalty on those with lower credit but not necessarily increasing the discount or decreasing the discount on a higher down payment because a credit score might be an inaccurate indicator of real risk in terms of a mortgage.
“Someone with a 680 compared to a 720 may have just not paid off their Costco card in time for us to pull their credit, but that’s not as impactful on a house as someone’s primary residence to me as how much equity are we putting in this property,” he said. “The likelihood that someone is going to pay on time at a 720 and the 680, while not virtually identical by the algorithms of the credit, I think in the real world are virtually identical.”
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