Todays WSJ: "According to calculations by Evercore ISI, buyers with strong credit scores between 720 and 739 who make 15%-20% down payments will see their rates increase by 0.750%. Borrowers who put down 20%-25% will see rates increase by 0.500%.
The winners are borrowers with weak credit scores -- that is, riskier borrowers. Under current FHFA policy, a borrower with a weak credit score below 620, who is borrowing more than 95% of the value of their home, pays 3.750%. Under Ms. Thompson's new plan, those borrowers will see their fees decrease by 1.750%.
Ms. Thompson, who regulates Fannie Mae and Freddie Mac, says the federal mortgage guarantors "don't subsidize borrowers based on their credit scores." But the new FHFA numbers will reduce fees for all borrowers with credit scores below 680 and all borrowers who have a down payment of 5% or less.
These numbers matter because this is how the mortgage market prices risk. When the cost of loans is disconnected from the likelihood of default, bad things happen."
"The American Enterprise Institute looked at default rates of Fannie/Freddie owner-occupied 30-year fixed rate purchase loans acquired in 2006-2007 and found that among borrowers with credit scores between 720 and 769 and 20% down payments, the default rate was between 4.2% and 8.8%. Among borrowers with less than 4% down payments and credit scores between 620 and 639, the default rate was between 39.3% and 56.2%.
Ms. Thompson says the loan fee changes will support lower-income home buyers who "nonetheless have the financial capacity and creditworthiness to sustain a mortgage." But Ms. Thompson ignores that the FHFA has also slashed fees for borrowers who have small down payments and poor credit.
Lowering fees on higher-risk mortgages doesn't enhance Fannie and Freddie's "safety and soundness." Divorcing price from risk creates dysfunction in the mortgage market, sometimes in unpredictable ways, and taxpayers are on the hook. The fees may not even make housing more affordable because increasing demand without more supply will result in higher prices.
The rule is finally getting noticed in Congress, which may also have Ms. Thompson's attention. House Financial Services Committee Chair Patrick McHenry and Housing and Insurance subcommittee Chair Warren Davidson said this week they'll try to repeal the fee changes if they take effect as planned.
The FHFA is trying to make housing more affordable for some buyers by charging others more. Sounds like socializing credit risk to us."
