Under a new Biden administration rule, homeowners with good credit would pay higher mortgage rates to subsidize loans to people with less credit. GOP Representative Michael Lawler of New York told Newsweek that the new rule unfairly penalizes Americans for having good credit and rewards those who accrue debt and don’t pay their bills with cheaper loans. It is not right to reward people with bad credit so that they will be able to access housing. The goal is to lower inflation, reduce property taxes, reduce energy costs, and invest in critical infrastructure.
The fee goes into effect on May 1 and will apply to purchasers with credit scores of 680 or above. The penalty for having a good credit score will amount to almost $40 per month on a $400,000 home loan or nearly $500 per year. Homebuyers with down payments of 15% to 20% will face the highest costs.
According to industry experts, the revisions would aggravate homebuyers with good credit scores and those trying to refinance because they will be penalized for having a high score and knowing how to manage their finances.
Ian Wright, a senior loan officer, believes the adjustments are illogical. Penalizing consumers the put down a higher down payment or have better credit scores will not be well received. Especially when consumers are already overwhelmed with paperwork, jargon, etc., it complicates things for them. It is never a good idea to confuse the borrower.
Wright further claims that the law would cause customer service issues for lenders and individual loan officers because consumers would be confused about why their interest rates and fees suddenly changed.
Wright said he is all for first-time buyers getting a chance to get into the market, but it’s clear that these decisions aren’t being made by people who understand the entire mortgage process.
The additional costs will create extreme confusion as we enter the traditional spring home purchase season, according to David Stevens, former chairman of the Mortgage Bankers Association and commissioner of the Federal Housing Administration under the Obama administration.
After a difficult year, an industry struggling to recover will not benefit from this confusing strategy, Mr. Stevens said in a recent social media post. Stevens added that doing so at the start of the spring market insults the market, consumers, and lenders.
The housing market has taken a significant blow due to a series of Federal Reserve interest rate rises, which have forced mortgage rates above 6%, about double the level seen in early 2022. The Fed has raised interest rates quickly to reduce inflation, which reached a four-decade high of 9.1% last summer.
As a result of the new Biden regulations, those with lower credit scores and lower down payments will now qualify for a better mortgage rate and reduced costs.
Kenny Parcell, from the National Association of Realtors, said he gave testimony to the Federal Housing Finance Agency earlier this year advising now is not the right time to raise fees for homebuyers after mortgage rates soared by three points.
Meanwhile, FHA Director Santra Thompson, who Biden chose, stated that the price changes will “increase pricing support for purchase borrowers limited by income or wealth” and that the agency views the fee increases as “minimal.”
In sum, the fee modifications would subsidize higher-risk borrowers by inflicting “an intentional disruption to traditional risk-based pricing,” as Stevens puts it.
What was the purpose of doing this? The answer is simple: to try to close the credit gap, particularly for minority home buyers, who frequently have lower down payments and bad credit scores, he said on LinkedIn. There is a real gap in homeownership opportunities, and America is experiencing a significant scarcity of affordable houses for sale, producing an imbalance. However, conflating price and credit is not the solution to this problem, nor is penalizing people who have worked hard to improve their credit scores and have multiple jobs so that they can pay all their bills on time.