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Debate Over New GSE Pricing Framework Rages

May 02, 2023

GOP proposes 2 bills in Congress to repeal; Urban Institute says changes don't penalize rich to help poor.

The Federal Housing Finance Agency’s changes to Fannie Mae’s and Freddie Mac’s single-family pricing framework continue to spark debate, with Republicans in Congress filing bills to repeal them even as a new report says the changes don’t actually force the wealthy to subsidize the poor.

Two GOP members of the House last week stated that is the reason they each introduced separate bills seeking to overturn the changes.

On April 26, Rep. Stephanie Bice, R-Okla. and vice chairwoman of the Republican Main Street Caucus, introduced a bill she calls the “Free Market Mortgage Act of 2023.” The text of her bill is not yet available, but according to information posted to congress.gov, H.R. 2876 is intended “to cancel certain proposed changes to loan level price adjustments by the Federal National Mortgage Association and credit fees charged by the Federal Home Loan Mortgage Corporation.” 

The Federal National Mortgage Association is Fannie Mae; the Federal Home Loan Mortgage Corp. is Freddie Mac.

Bice’s bill has been referred to the House Committee on Financial Services. Even without the text, her bill has 19 co-sponsors, all Republicans.

In an interview with Fox News, Bice said she introduced the bill because “we should not punish individuals who have made sound financial decisions or have the government incentivize lowering credit scores.”

One day later, on April 27, Rep. Andy Biggs, R-Ariz., introduced a bill he calls the “Responsible Borrowers Protection Act.” H.R. 2928 proposes “To cancel certain proposed changes to credit fees charged by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and for other purposes.”

Like Bice’s bill, Biggs’ bill also lacks any text, but has 35 co-sponsors, all Republicans. It also was referred to the Financial Services Committee.

Biggs said in a news release that his legislation “will prohibit the news fees from going into effect,” but the new pricing framework officially went into effect on May 1.

“The Biden administration's latest effort to enforce equity in the housing market is offensive and un-American,” Biggs said. “Borrower's with excellent credit should not be punished for doing right and be forced to bear more financial burdens due to the fiscal irresponsibility of others.”

Robbing The Rich To Help The Poor

That complaint — that the new rules force those with stronger finances to subsidize those who need help, essentially robbing the rich to help the poor — has been raised nationwide. 

FHFA Director Sandra L. Thompson has pushed back, saying such claims are the result of a “fundamental misunderstanding” of the fees and why they were updated.

In a letter posted to the FHFA website last week, Thompson defended the changes, saying Fannie Mae and Freddie Mac — collectively, the enterprises — “charge fees to compensate them for guaranteeing borrowers’ mortgage payments, which in turn attracts investors across the globe to provide liquidity for the U.S. mortgage market and, ultimately, reduces interest rates for homeowners.”

She continues, “A portion of their fees are ‘upfront’ fees that are based on risk characteristics of the borrowers and the loans they are obtaining. Said differently, the enterprises engage in risk-based pricing to, among other things, better ensure their safety and soundness, protect taxpayers, and serve their mission.”

Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less, Thompson said. “The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.”

'Criticism Is Misplaced'

A report released Tuesday by the Urban Institute supports Thompson’s defense of the changes.

“Critics claim that FHFA is overcharging those with good credit so that it can undercharge those with bad credit, making homeownership more challenging for one group to make it easier for another,” Jim Parrott, a nonresident fellow with the institute’s Housing Finance Policy Center, wrote in an article posted on the institute’s website. “But the criticism is misplaced, conflating two separate, largely unrelated moves on pricing for the government-sponsored enterprises, or GSEs.”

He continued, “Last year, FHFA increased pricing on loans for which there is less justification for deep government support — loans for vacation homes, investor properties, million-dollar homes, and cash-out refinancing. And FHFA has used the increased revenues from those changes to decrease costs for people who genuinely need the help — borrowers with limited wealth or income.”

Parrot said FHFA increasing pricing in the GSEs’ core business — the changes that took effect May 1 — was a separate, unrelated move that was intended “not to generate cross-subsidy, but to cover the higher capital requirements [for the GSEs] that went into effect last year.”

The new increases, he said, will “raise pricing on the average loan in [the GSEs’] core business by about 4 basis points, or $10 a month for someone taking out a $300,000 mortgage. A modest portion of that increase will cover the risk that profits from business lines that warrant less government support fall short of what is needed to cover those that warrant more government support. But the portion of the cross-subsidy these changes cover is small.”

Parrot again noted that critics say the GSEs will charge some borrowers less if they put down a smaller down payment, claiming that as proof that FHFA will cross-subsidize within its core business.

“As borrowers who put down less for a down payment typically pose more risk, it suggests that FHFA is making homeownership unnecessarily expensive for some to make it less expensive for others,” he said. “But this leaves out a critical piece of the story.”

That piece, he said, is that anyone who makes a down payment on a home that is less than 20% of its value is required to pay for private mortgage insurance. “So those who put down less than 20% pose less risk to the GSEs and should pay less in fees to the GSEs,” he said.

He continued, “If the cost of mortgage insurance is added to the GSEs’ pricing grid, the borrowers’ costs will track their risk as one would expect: those with lower credit scores will pay more than those with higher credit scores, and those with higher LTV [loan-to-value] ratios will pay more than those with lower LTV ratios.”

Parrot concludes by saying that, “despite the recent coverage, … FHFA is not raising fees on borrowers with good credit to lower them for those with bad credit.”

About the author
David Krechevsky was an editor at NMP.
Published
May 02, 2023
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