THERE ARE OTHER MARGINS ALONG WHICH TO OPTIMIZE.

The latest attempt by the Jarrett regency to place equity first is means-testing of the filing fees for mortgages that will be sold to the federal agencies.

Homebuyers with good credit scores will soon be facing higher mortgage fees as the Biden administration seeks to close the racial homeownership gap and get more first-time and low-income buyers through the door.

Starting in May, a new federal rule will upend the current structure of the Loan-Level Price Adjustment (LLPA) matrix. Homebuyers with a good credit score could see their monthly mortgage payment rise by over $60 a month, while riskier borrowers will get more favorable mortgage terms because their fees were reduced. It's a move the Federal Housing Finance Agency (FHFA) hopes will address housing affordability challenges in the U.S., but it's come under scrutiny for being unfair and potentially ineffective.

"In the short term, this may increase homeownership among the targeted group, but I'm afraid it could decrease homeownership among the middle class," Jerry Howard, CEO of the National Association of Home Builders, told Newsweek. "I'm not sure that we're not robbing Peter to pay Paul here."

Only about 25 percent of homebuyers with Federal Housing Administration loans are people of color, according to the White House. Black and Hispanic people, on average, have fewer savings to use as a down payment on a home and tend to have lower credit scores, according to David Stevens, former CEO of the Mortgage Bankers Association (MBA) and a former FHA commissioner during the Obama administration.

The Loan Level Price Adjustment matrix stipulates a variety of fees based on the borrower's credit score, the life of the mortgage loan, and the loan-to-appraised value ratio.  Under the proposed change, more creditworthy borrowers pick up some of the origination fees that would otherwise be borne by less creditworthy borrowers, whose creditworthiness might reflect a number of things.

Let Mr Stevens continue.

He told Newsweek that this can be attributed to factors like distrust in the banking system or being a first-generation American and that low credit scores can be a significant barrier to homeownership.

But in order for the FHFA to close the gap by bringing down LLPAs for those borrowers, the agency has to compensate for the reduction in borrowing fees by raising the LLPAs of borrowers with higher credit scores, who tend to be white. The average credit score in white communities was 727 in 2021, compared with 667 in Hispanic communities and 627 in Black communities, according to data analyzed by FinMasters, a personal finance blog.

The effort to get more low-income Americans and Americans of color into homeownership is essentially being subsidized by borrowers who have better credit scores and who can contribute more to their down payment, Michael Borodinsky, a vice president at Caliber Home Loans, told Newsweek.

Predictably, the people whose means are being tested are not happy.

Borodinsky said while the plan was designed to help people who have historically faced obstacles to homeownership, it comes at the cost of negatively affecting buyers who worked hard to save enough money for a larger down payment and maintain a strong credit rating, especially since those buyers can "be of all demographics."

"This new rule unfairly penalizes Americans for having good credit and rewards those who accrue debt and don't pay their bills with cheaper loans," GOP Representative Michael Lawler of New York told Newsweek. "The way to expand access to housing isn't to reward bad credit. It's to bring down inflation, reduce property taxes, cut energy costs and invest in critical infrastructure."

I don't know, maybe too much land-use planning and too structured zoning will do more to expand access to housing than any bundle of government action taken, often to undo the effects of previous bundles of government action.  For the moment, though, the Wise Experts are justifying their action.

Although the new rule, which takes effect May 1, is designed to assist low-income and minority borrowers by encouraging homeownership, industry experts have expressed concern that the plan fails to meet that goal.

Stevens said that while the generational limitations on homeownership among racial groups in the U.S. need to be addressed, FHFA Director Sandra Thompson's actions weren't enough to lower borrowing costs to the point it will "make a difference."

"We just went through to this completely convoluted discipline around risk-based pricing in the hopes of accomplishing something that isn't going to be accomplished," he said.

However, in a statement shared with Newsweek, the FHFA defended the changes. It called the recalibration of its pricing framework "minimal" and stressed that the agency's goal of making sure that the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac "fulfill their role in any market condition."

Those might be the intentions.  A Reason article calling attention to the same points Newsweek reported also provided a useful link to Mortgage News Daily.

The effective penalty for having a credit score under 680 is now smaller than it was. It still costs more to have a lower score. For instance, if you have a score of 659 and are borrowing 75% of the home's value, you'll pay a fee equal to 1.5% of the loan balance whereas you'd pay no fee if you had a 780+ credit score. But before these changes, you would have paid a whopping 2.75% fee. On a hypothetical $300k loan, that's a difference of $3750 in closing costs.

Elsewhere in the spectrum, things got worse. Borrowers with higher credit scores will generally be paying a bit more than they were under the previous structure.

How much more? None of these articles estimate that, because they can't.

Interest rates are set partly based on your riskiness as a borrower. The riskier you are to a lender, the higher your interest rates will be. Mortgage lenders use credit scores to determine whether you qualify for the mortgage and to determine risk and the likelihood that you will default on your mortgage loan. The higher your credit score, the lower the risk that you’ll default on your loan, and the lower the interest rate you’ll qualify for.

A high credit score demonstrates responsibility with your previous credit obligations. You’ve made your payments on time, you’ve kept your balances low, and you’ve avoided major credit blunders like debt collections and charge-offs.

A low credit score, on the other hand, is the result of falling behind on credit card payments, keeping high balances, and perhaps having major delinquencies on your credit record.

That explanation also notes, "Your mortgage lender can give you exact terms after reviewing your complete financial details and down payment," as well as, "The difference between getting a mortgage with a 620 credit score and a 760 credit score boils down to $203 per month on your mortgage payments and $73,263 on the total interest paid over the life of the mortgage," that for a hypothetical thirty-year, fixed-rate mortgage of $200,000.  Contrast that with the story popular among critics of the measure, here from that Reason article. "For instance, someone with a $400,000 loan and a 6 percent mortgage rate may wind up paying about $40 more per month, according to Stevens' calculations. But an extra $40 per month means an extra $480 per year. And over the whole course of mortgage repayment, a homeowner could wind up paying thousands of dollars more due to the fee shift."  The way I see it, that borrower is still in a better place with the lower interest rate, and perhaps that's what Our Political Masters are hoping for.  The more creditworthy borrower comes out ahead of the less creditworthy, even with the proposed changes to the fees.

That's not the end of the story, dear reader.  Nobody in Washington is regulating lending rates, and creditworthy people probably know something about shopping around, and lenders know something about adverse selection, particularly after 2007-2008.  Could the revised origination fee schedule perhaps lead to less lending to the people the Wise Experts are hoping to help?  Redlining, aided and abetted in the name of equity, anyone?