Understanding the Fannie Mae and Freddie Mac mortgage rates changes

Those seeking to buy a home in the coming days will be faced with a new fee structure if they choose to pursue a mortgage backed by Fannie Mae or Freddie Mac.

As of May 1, fees associated with loans backed by Freddie Mac and Fannie Mae have changed depending on a borrower’s credit score. Those with lower scores will potentially benefit from paying smaller fees than under the old guidelines, though their fees will still generally remain higher than those paid by those making a similar down payment but with a higher credit score.

The fees were set by the Federal Housing Finance Agency (FHFA), which is tasked with regulating Fannie Mae, Freddie Mac, and Federal Home Loan Banks.

Those with higher scores now pay higher fees than they did before May 1. The differences in the size of these fees can be significant. The fees are known as Loan Level Price Adjustments (LLPAs), and the current matrix of LLPAs can be found at this link: https://singlefamily.fanniemae.com/media/9391/display

An additional alteration to fees as established by Debt-To-Income (DTI) Ratios was also proposed, but was rescinded by the FHFA on May 10 before its proposed August implementation.

Karen Mulreed, the co-owner of Westport Mortgage, expressed relief that the DTI component had been dropped.

“Thank God,”Mulreed said. “Some of those DTI changes would have really hindered the housing market. It would have made underwriting a nightmare.”Mulreed explained that the changes could lead to housing deals breaking down at the last minute after an emergency purchase on a credit card or other unexpected expense that may not truly reflect the ability of a buyer to conduct the purchase.

“You could be saying, ‘I have everything set. I have all my financing in place.’ And if at end the lender reruns the credit as they do all the time that could squash the deal,”Mulreed said.

On the subject of the new FICO rules, Mulreed doubted that many homebuyers would change their habits significantly under current market conditions.

The fees for smaller downpayments have also been revised, leading to some reconsideration on the part of current homebuyers.

“I’ve already had conversations with multiple people that say, ‘Why is my interest rate higher when I’m putting down 20% versus if I put down 10%?'”said Manny Gomes, senior vice president of mortgage lending at Westport- and Southport-based Guaranteed Rate. “It’s hard to justify it. From a risk pricing model perspective, it makes no sense. And that is what makes this challenging.”Gomes professed confusion about the logic behind the adjustments, and said he wasn’t certain if the “Robin Hood”aspect of raising rates for those with high scores and lowering it for those with low scores was true or if it was the result of a measure to combat inflation.

“Unfortunately, much of what has been reported advances a fundamental misunderstanding about the fees charged by [Freddie Mac and Fannie Mae] and why they were updated,”said a statement from FHFA Director Sandra L. Thompson on April 25. “To be clear, the series of steps taken by FHFA to update the [Federal] Enterprises’ pricing framework will bolster safety and soundness, better ensure the Enterprises fulfill their statutory missions, and more accurately align pricing with the expected financial performance and risks of the underlying loans.”Gomes described the actual impact on his business as creating additional confusion among customers.

“Now we have to educate the consumers on how this works, when something doesn’t make sense, everyone fights against it,”he stated.

Gomes said he told customers that it may be in their best interest to make a smaller down payment, but doubts that the changes will help those with poor scores buy homes with costs offset by those with better FICOs as some commentators have speculated.

“FHA [Federal Housing Administration] has lower interest rates and lower mortgage insurance,”he said. “I think consumers who would have gone with conventional loans will more than likely choose to go with the FHA loan. For those who have a bank that offers both, they will probably be okay, but right now the biggest problem in our market is the lack of inventory.””For somebody who has been looking for the last six months, these pricing adjustments kind of put them back to where rates may have been a few months back,”Gomes added. “If rates continue to move lower from a consumer’s perspective, they’re still better off than they were before. If someone entered into the housing market for the last six months and they’re okay with where rates were six months ago, psychologically this will have no difference on them. It’s the new home buyers that may have a little sticker shock.”