State governments push to scrap the new LLPA fee changes

A coalition of fiscal officers from 27 state governments called on the Biden administration and the Federal Housing Finance Agency (FHFA) to scrap the loan-level pricing adjustment (LLPA) fee changes that went into effect on May 1. 

In a letter to President Joe Biden and FHFA Director Sandra Thompson, the fiscal officers said the new policy will force homebuyers with good credit to pay more on their mortgage every month. 

“Those who make down payments of 20% or more on their homes will pay the highest fees – one of the most backward incentives imaginable,” the letter said. 

The increased fees will subsidize higher-risk borrowers by handing out better mortgage rates to people with lower credit ratings who have saved less for a down payment, according to the letter. 

In January, the FHFA made a series of significant changes to the LLPA fees charged by Fannie Mae and Freddie Mac on conventional/conforming mortgages, introducing a “revamped” LLPA matrix that differentiates pricing by loan purpose, with grids for purchase loans, limited cash-out refinance loans, cash-out refinance loans and additional LLPAs by loan attribute. 

The LLPA changes make permanent the reduced or eliminated fees for first-time homebuyers and those with low and moderate incomes. The changes also include significantly reduced fees for borrowers with lower credit scores but strong down payments. 

The fee changes were expected to hit borrowers with FICO scores between 720-739 and 740-759 the hardest, resulting in these borrowers paying thousands of dollars more in some cases. 

The most controversial change was the addition of the LLPA tied to a borrower’s debt-to-income ratio, which will charge a fee for borrowers with a DTI at 40% or higher. But following uproar from the industry — including the Mortgage Bankers Association (MBA) — the FHFA has delayed the implementation of the DTI-based LLPAs until August. 

While there’s a gap in access to credit, and while low credit scores are a significant barrier to buying a home, the right way to solve the problem is not to penalize hardworking, middle-class American families by “confiscating their money and using it as a handout,” according to the letter. 

The new policy will be a “disaster” at a time when the real estate market already slowed considerably due to high-interest rates — and it will further depress home sales, fiscal officers said. 

The letter comes after a group of Republican lawmakers in the U.S. House of Representatives, led by Rep. Andy Biggs (R-Ariz.), introduced a bill that aims to block changes in the LLPA fees. 

“The FHFA—led by a President Biden appointed director—is punishing financially responsible mortgage borrowers,” Biggs said in a statement.

“Their agenda of equity over equality defies common sense and will endanger the stability of the housing market. I hear regularly from constituents about the high cost of housing, which has been exacerbated by the insane interest rates imposed to combat Biden’s skyrocketing inflation.”

With misinformation spreading about the LLPA changes, Thompson issued a statement emphasizing that higher-credit-score borrowers are not being charged more than low-credit-score borrowers. 

“The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment,” Thompson said. 

Despite Thompson’s statement, loan officers have been raising concerns that the new changes are keeping middle-income borrowers with high credit scores from homeownership. 

“If you look at a borrower with a 740 to 750 in FICO score, these borrowers used to not get hit at all on interest rates. There used to be no real adjustments for anybody with a 740 or higher FICO score,” a production manager in Northern California said in an interview with HousingWire. 

But with the change, a borrower with a credit score of 740 or higher who has a down payment between 15% and 20% would be hit with three-quarters of a point on their loan.

“So on a $400,000 loan, their loans are getting $3,000 more expensive for borrowers that used to be considered the cream of the crop. So that’s what the real outrage is,” the production manager said. 

However, a borrower with a 660 credit score and a 5% down payment is more likely going to end up with an FHA loan because the rate and mortgage insurance costs are lower, the loan officer explained. 

“So what it’s really doing is basically just placing a tax on borrowers with very, very good credit and people that have done all the right things, they’ve saved some money, they’ve managed the finances well enough to have these credit scores in the 720 to 760 range. It’s basically putting a tax on these folks,” the loan officer said.