Mortgage Fees Increase Today. Are They as Bad as Reported?

Starting today, fees on certain types of mortgages could increase — especially for those with better credit scores.

But, the practical impact may not be as bad as is being publicly reported.

“I can’t tell you if that was the right thing or the wrong thing to do. It’s the thing that’s been done. But again, the better the credit, the better the interest rate still holds true. It also holds true on mortgage insurance,” said Chris Robson, a broker with Granville Home Loans.

(Disclosure: Darius Assemi, publisher of GV Wire, is the majority owner of Granville Home Loans.)

The difference between a high credit score of 780 versus a lower score of 630 is about 1.25% in the respective mortgage rates, Robson said.

New Rules Do Increase Certain Fees

Under the new rules implemented by the Federal Housing Finance Agency, mortgages guaranteed by two quasi-federal backers — Fannie Mae and Freddie Mac — those with a higher credit score will see a higher increase in the percentage of fees they pay than those with a lower score.

However, those percentages are still lower for those with better credit scores.

For example, ABC News said that for a 30-year loan on a $400,000 home with 25% down: borrowers with a credit score of 750 would see the fee percentage go from 0.250% to 0.375% — a $750 increase. A credit score of 650 would see the fee decrease, from 2.75% to 1.5%, a $3,750 saving.

Borrowers who use other financial institutions for mortgages, such as private lenders, will not be affected. During the pandemic, Fannie Mae and Freddie Mac backed more than 60% of the mortgage market.

The chart above shows the fee rate change for Fannie Mae and Freddie Mac loans. The red shows where rates have gone up. Loan to Value is the percentage of the home value the buyer is borrowing (the rest would be the down payment). FICO is the credit score. The bottom chart shows the new fee percentages. (Provided by Chris Robson)

FHFA Justifies Changes

The goal of the rate changes is “to expand opportunities for affordable homeownership,” Robson said.

Officially known as Loan Level Price Adjustments, FHFA says adjusting the rate is nothing new.

An FHFA spokesman explained the changes are necessary to prevent a future financial disaster.

“These changes better protect Fannie and Freddie from risk in today’s housing market and they protect taxpayers so they aren’t on the hook for another bailout,” FHFA spokesman Adam Russell said.

Russell said there hasn’t been a fee review “in quite some time and the housing market has changed quite substantially in recent years.”

Said Robson: “They are tinkered with on a regular basis. And in this case, it used to be up until these ones came in, 740 was the credit score you needed to get the best interest rate. It’s now become 780.”

There is also a distinction, Russell notes, between credit score and wealth.

“The priorities … include developing a pricing framework to maintain support for single-family purchase borrowers limited by weal​th or income (not low credit scores), while also ensuring a level playing field for large and small sellers,” Russell said.

FHFA pointed to an Urban Institute analysis, which said when you factor in private mortgage insurance — required for home purchases with less than a 20% down payment — “the apparent disconnection between risk and price in the table above disappears, with borrowers’ payments rising or falling according to the risk they pose.”

Tune in Tuesday

Robson will be a guest on GV Wire’s “Unfiltered” airing live Tuesday at 6 p.m. The show can be viewed on gvwire.com, youtube.com, and facebook.com.