Many people have seen this image online and are wondering: will I get a better mortgage with a worse credit score?
No, but it's complicated.
This issue centers around Fannie Mae. Most have heard of this organization from the 2008 financial crisis, but few actually know what they do.
FANNIE MAE
Fannie Mae guarantees or 'back-stops' certain loans. They don't originate the loans, a local bank would do that, but the local bank then 'sells' that loan to Fannie Mae. Fannie Mae combines these loans and sells portions to investors – known as Mortgage Backed Securities.
Fannie Mae is effectively owned by the US government, meaning that the US Government effectively guarantees the loans.
LOAN FEES
Because Fannie Mae assumes so much risk, they charge an extra upfront fee depending on the intersection of your down payment and credit score. The new fees take effect May 1st on new loans. See the matrix below:
Source: https://singlefamily.fanniemae.com/media/9391/display
This fee is usually translated into an interest rate applied to a loan, not paid all at once.
As you can see, at the same down payment %, a person with a lower credit score is paying a greater fee than someone with a better credit score. It makes sense – the worse your credit score, the greater risk you pose for default.
However, people are upset that Fannie Mae did the following:
Increased the fee for good credit borrowers
Decreased the fee for poor credit borrowers
Good Credit Score Adjustment:
Someone with a good FICO credit score of 740 and a 15-20% down payment will pay a 1% fee, up from 0.25%.
For a $400k 30-year home mortgage at a 6% interest rate, there will be an additional $40/mo, or $480/year, or $14,400 over the course of the loan.
The lowest credit score for the same category, below 640, is paying a 2.875% fee.
Poor Credit Score Adjustment:
Someone with a 620 FICO credit score and a 5% down payment is paying a 1.75% fee, down 50% from the previous fee of 3.50%.¹
Ultimately, you are still paying more of a fee if you're credit score is worse. But the intention is to decrease the cost for lesser qualified borrowers at the expense of more qualified buyers. This is confirmed by Sandra Thompson, director of the Federal Housing Finance Agency, who controls Fannie Mae. She says that the new rule will, "increase pricing support for purchase borrowers limited by income or by wealth."²
MY HOT TAKE (analysis)
I don't know the reasoning, but there appears to be less of a fee at 5% down than at 20% down for the worst credit score category (1.75% for 5% down | 2.75% for 20% down). I fear the rule will artificially subsidize irresponsible debt-taking by those who can least afford it.
The 2008 financial crisis was caused, in part, by too many underqualified borrowers receiving loans for homes they could not afford. A fact often blamed on greedy mortgage bankers.
However, one less discussed aspect of the '08 crisis is that many of the lax loan standards came as a result of the Community Reinvest Act of 1977. As Phil Gramm, former Senator and vice chairman of UBS said in a 2009 Wall Street Journal artical³:
"Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans. Looser underwriting standards spread beyond subprime to the whole housing market.
Countrywide Financial Corp. cloaked itself in righteousness and silenced any troubled regulator by being the first mortgage lender to sign a HUD "Declaration of Fair Lending Principles and Practices." Given privileged status by Fannie Mae as a reward for "the most flexible underwriting criteria," it became the world's largest mortgage lender -- until it became the first major casualty of the financial crisis.
The 1992 Housing Bill set quotas or "targets" that Fannie and Freddie were to achieve in meeting the housing needs of low- and moderate-income Americans. In 1995 HUD raised the primary quota for low- and moderate-income housing loans from the 30% set by Congress in 1992 to 40% in 1996 and to 42% in 1997."
I would hate for the same consequences to result from the same best intentions.
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¹https://nypost.com/2023/04/16/how-the-us-is-subsidizing-high-risk-homebuyers-at-the-cost-of-those-with-good-credit/
²https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Updates-to-Enterprises-SF-Pricing-Framework.aspx
³https://www.wsj.com/articles/SB123509667125829243
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