The Federal Housing Finance Agency is considering reducing risk-based fees on loans backed by Fannie Mae and Freddie Mac that critics say have priced many qualified and first-time homebuyers out of the conventional mortgage market.
Acting FHFA Director Sandra Thompson said Thursday that the agency is weighing changes to the loan-level price adjustments enacted in 2008 to help the government-sponsored enterprises manage risk.
Mortgage lenders, Realtors and housing experts have urged the FHFA for years to eliminate the fees that raise the cost of a home loan for many borrowers.
“One of the things that we are committed to doing is taking a look at pricing. We haven't done a holistic review of the Fannie-Freddie pricing analysis and everything that comprises the guarantee fees and pricing for enterprise loans,” Thompson said at a virtual event of the National Housing Conference. “So we are going to take a look at that. It is on my to-do list.”
Many industry experts say the loan-level price adjustments were unnecessary when they were first enacted during the financial crisis. Housing experts have long claimed that the fees disproportionately prevented creditworthy Black and Hispanic consumers from becoming homeowners.
The loan-level price adjustments were added to the cost of home loans backed by Fannie and Freddie under former acting FHFA Director Ed DeMarco. He wanted an additional buffer to account for the risk posed by borrowers with lower down payments. The fees can add up to 3.75% in upfront fees but typically translate into roughly 0.75%, or 75 basis points, added to a borrower's annual interest rate.
The GSEs are required by law to finance only loans in which the borrower has demonstrated an ability to repay. Many experts think the loan-level price adjustments clash with the GSEs’ mandate to support underserved communities since the fees reduce the affordability of loans backed by Fannie and Freddie.
But borrowers that are unable to make a 20% down payment on a home are required to have private mortgage insurance as well, which means many borrowers with low credit scores and down payments are priced out of the conventional market. They typically obtain home loans from the Federal Housing Administration.
“Fannie and Freddie are double pricing home buyers because not only are they forcing them to pay for the mortgage insurance, they also pay these loan-level price adjustments and both are essentially providing first-loss coverage,” said Dave Stevens, a former FHA commissioner who is now the CEO of Mountain Lake Consulting.
Thompson, who has been acting director since June, also spoke about the FHFA's plans to close the racial-equity gap in homeownership. The agency is requiring that Fannie and Freddie develop three-year plans to identify geographic areas that have been previously subject to redlining, and to find quantifiable activities to address the racial-equity gap. It wants feedback from industry on what should be included in the plans.
“We've had this conversation for I can't remember how many years and it's just taken too long,” Thompson said. “We really want the enterprises to put together some strategies to try to help us move the needle on equitable housing.”
Thompson, who was most recently the deputy director of the FHFA’s Division of Housing and Mission Goals, has been at the agency since 2013. Before joining the FHFA, she worked for 23 years at the Federal Deposit Insurance Corp., ultimately serving as the director of risk management supervision. She became acting director
Thompson also discussed the FHFA’s
"People thought, 'Oh no, that's opening the credit box,' " she said, describing many other factors that go into the underwriting process.
“We are focused on sustainability and giving people loans that they have the ability to repay,” said Thompson. “Sometimes those loans with more risky characteristics have compensating factors. People have down payments or they've got reserves. We are taking a holistic view of a borrower's ability to repay.”
Since Thompson took the helm, the FHFA
Thompson described the importance of taking what she called a holistic view of GSE policies.
"I think it's really important as we are directing the conservatorship of the enterprises to look at the impact of policies — what's the impact on fair lending, what's the impact on affordability — and to take a holistic view," she said.
