How new loan pricing at housing agencies affects spring home buying

First-time homebuyers might want to look more closely at what they pay for government-sponsored enterprise versus Federal Housing Administration loans.

That's one outcome of a new pricing grid going into effect at the government-sponsored enterprises and an annual premium cut at the Federal Housing Administration, both of which are aimed at giving borrowers with lower incomes more opportunities to build wealth this spring. 

Trade groups have been hoping the GSEs would rethink their pricing changes because they can further complicate a homebuying season already challenged by recent bank hardships, rate volatility, inflation, and a housing shortage, but most are moving ahead.

Some GSE pricing changes that are tied to debt-to-income ratios had been delayed at deadline, but others based on loan-to-value ratios, loan type and credit scores remain. 

"The new fees are effective with loan deliveries for May 1, which means borrowers applying for loans today," Broeksmit said in an interview just before the official onset of peak homebuying season in March. "When the Fed has already done such an effective job of slowing the housing market it's hard to have something else that could be a depressant in some respects." 

An earlier cash-out refinance fee hike by the GSEs, intended to offset last October's removal of loan-level price adjustments for certain lower-income borrowers, was also added. But those loans have dwindled, and it's not clear how much that has to do with the increased cost for borrowers as opposed to other factors. These have included volatile but generally higher rates that have made it less attractive to refinance in general, softer home prices that made lenders more wary of allowing borrowers to withdraw cash, and timing restrictions that both Fannie and Freddie have implemented for cashouts.

"It's really tough to see how impactful that's been," said Brian Gilpin, senior vice president, capital markets, at Embrace Home Loans, commenting on the difficulty seeing how much GSE pricing changes alone have affected cash-out refi originations.

Meanwhile, the more recent and complex changes to the GSEs' pricing grids may be hard on lenders operationally but do benefit certain purchase borrowers while raising costs for others. Beneficiaries include those with credit scores below 700 and loan-to-value ratios above 75%, in many cases.

"There are certain combinations that can create a better rate," said Melissa Cohn, a regional vice president at William Raveis Mortgage who works in New York and Florida markets. In those cases, some borrowers that more typically got FHA loans may want to compare GSE rates.

And FHA loans are becoming more competitive too with the 30 basis point drop in their annual premiums so there's more reason for borrowers to consider both options, even those with higher credit scores who used to gravitate toward Fannie Mae and Freddie Mac.

"That seems like it moves some mortgages over to FHA from conventional," Gilpin said. "They kind of reshuffled the deck, and loans are going in slightly different directions than they would have been previously."

With the GSEs offering less favorable pricing in some cases, portfolio loans might be more competitive, said Cohn.

"I think it could steer people to go toward regional portfolio lenders," she said, acknowledging that this will depend on banks' pricing, funding resources, appetite for mortgages, regulatory requirements and whether or not a borrower wants a loan that could have a variable rate later.

Broeksmit thinks the appetite could be limited unless a borrower really is open to a mortgage with a hybrid rate.

"Demand for non government-backed mortgages ebbs and flows," he said. "I think you still have a lot of depositories who prefer jumbo loans to conforming, whether that's because they see a value in cross selling wealth-management to the borrower or there may be some efficiencies."

Lenders will often make larger loans if they can because generally the costs per unit are similar for all mortgages, but jumbos are more profitable. Still, lenders need to fulfill fair lending and other regulatory requirements that encourage them to make or buy a broader range of loans.

And the initial period for the hybrid rates they offer could look attractive compared to the fixed rate for loans the GSEs offer, Cohn noted.

"Those rates are generally lower than the fixed rates," she said. "For some people, it could be the better solution at the moment with rates fixed for seven, 10 or even 15 years and the average tenure of a homeowner less than 10 years."

But a lot could depend on a particular borrower's score and LTV with the GSEs offering price breaks to certain borrowers who have credit indicators below 700 and higher leverage, Cohn noted.

With recent bank failures highlighting risks related to funding and liquidity banks may well have more reluctance to compete for such loans, which could encourage a little more in the way of lending backed by private-label securities activity.

"It raises the question of does the PLS market start to come back a little bit?" Gilpin said.