Is there really a new unfair mortgage tax on those with higher credit?

May 3, 2023 by Mike Donoghue (reprinted with permission from Premium Mortgage)

Let me try to dispel the myths and false claims that a borrower with a low credit score is getting better rates than a borrower with a higher credit score.

Seemingly overnight, the internet has been filled with news regarding a "new," unfair tax on mortgage borrowers with higher credit scores. Some have gone so far as to suggest that someone could intentionally lower their credit score to get a better deal.

Before you stop paying your bills in the hope of cashing in, let's separate fact from fiction. First and most importantly, you will absolutely NOT get a better deal on a mortgage rate even if you have seen headlines like “A 620 FICO score gets a 1.75% fee discount and a 740 FICO score pays a 1% fee” and “Let your credit score go down so you get a better mortgage rate.” These statements are not true and have caused a lot of confusion when it comes to understating mortgage rates.

So why are we seeing these headlines?

This all has to do with changes to Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac (the "agencies"), the two entities that guarantee a vast majority of new conventional mortgages. LLPAs are based on loan risk features such as your credit score and the loan-to-value ratio among other things. Loan-level pricing adjustments are the government’s way of raising prices for “riskier” borrowers without putting a penalty to “safer” ones. Like an auto insurance policy, a person with more accidents (higher risk) will typically pay a higher auto premium.

The LLPA’s have changed several times since they were introduced in 2008 and a fairly substantial change was announced in January of this year. Some are asking if the change was announced in January why are we just hearing about it now. The changes to the LLPA’s are for mortgages ‘delivered’ or sold to the agencies on May 1. Since it takes 30-60 days to close on most new home mortgages which are then ‘delivered’ to the agencies these pricing changes were actually put into effect by lenders a few months ago with really no mention in the news or notice by borrowers.

Here are the facts: The fees imposed on borrowers with lower credit scores have decreased and the fees imposed on those with higher credit scores did in fact increase. That does not mean the lower credit score borrower will get a lower rate than the higher credit score borrower.

What it means is that based on the revised LLPA adjustments the borrower with a credit score of 680 may now get a rate of 6.625% instead of 6.750% and the borrower with a credit score of 740 may now get an interest rate of 6.500% instead of 6.375%.

So yes, the adjustments for lower credit score borrowers did decrease and the fees for higher credit score borrowers increased but the fees for a lower credit score are still much higher than they are for someone with a good credit score.

Fannie Mae and Freddie Mac technically have a mission to promote affordable homeownership. That is why they are decreasing the fees for the lower credit score borrower, because first time home buyers have historically had lower credit scores than repeat homeowners.

The Federal Housing Finance Agency that oversees Fannie Mae and Freddie Mac said the following about the LLPA changes. “FHFA is taking another step to ensure that Fannie Mae and Freddie Mac advance their mission of facilitating equitable and sustainable access to homeownership by developing a pricing framework to maintain support for single-family purchase borrowers limited by wealth or income.”

On that note, one of the biggest changes to the LLPA’s was for the First time Homebuyer with income less than the Area Median Income (AMI). These borrowers would have all LLPA’s removed and therefore are given interest rates better than most regardless of credit score or loan to value.

Here are a few key points about the LLPA changes:

The LLPA changes are in effect for loans sold to FNMA/FHLMC May 1 so most if not all banks and investors (including Premium Mortgage Corporation) have already made the changes to pricing 45-60 days ago.

First Time Homebuyers with combined income less than Area Median Income for your area are the biggest benefactors of the change. All LLPA’s will be waived for them.

In general pricing for borrowers with lower FICO scores 640-679 has improved and the pricing for borrowers with FICO scores of 720-779 has worsened.

a) That does not mean borrowers with lower FICO scores will get a better rate than a borrower with a high FICO score, it just means the adjustment to their pricing have been reduced.

One of the main reasons that FHFA made these changes is because they are under the gun to help first time homebuyers with minimal funds and low FICO borrowers buy a home. That is why pricing has improved for the 640-680 borrower as well as high LTV borrowers at any FICO level.

LLPA’s improve a little with LTV’s >80 because Mortgage Insurance adds a layer of protection for the end investor.

Please contact us if you have any questions and we will be happy to discuss these changes with you.