Republican senators slam Biden’s ‘perverse’ mortgage rule
A group of 18 Republican senators wrote a letter on Wednesday demanding details of how President Biden’s Federal Housing Finance Agency came to the decision to raise mortgage costs for those with good credit to compensate for those with poor credit.
The letter, led by Senators Roger Marshall, Ky., and Thom Tillis, N.C., said the policy “demonstrates a profound misunderstanding of the need to fine-tune home finance products to credit risk and creates a perverse incentive that penalizes hard-working Americans for their fiscal prudence.’
The new rule, which takes effect May 1, is part of a plan designed to address the gap in minority home ownership.
“Under your leadership, the FHFA has advanced a number of policy proposals and amendments aimed at socially manipulating the U.S. housing market in ways that increase risk and promote discrimination,” the senators wrote.
They continued, “FHFA seems intent on going further and implementing a system that willfully ignores the realities of credit in an effort to push Americans into homes they may not be able to afford. The fact that only a decade and a half after the housing market-led financial crisis of 2008, FHFA is openly coming out with a proposal that flaunts credit risk is staggering.”
The letter, led by Senators Roger Marshall, Ky., and Thom Tillis, N.C., said the policy “demonstrates a profound misunderstanding of the need to fine-tune home finance products to credit risk and creates a perverse incentive that penalizes hard-working Americans for their fiscal prudence’
The letter comes a day after Republican Representatives Patrick McHenry and Warren Davidson sent a letter promising action if the Biden administration does not reverse the changes.
Financial Services Chairman McHenry, RN.C., and Housing and Insurance Subcommittee Chairman, Davidson, R-Ohio, said they would repeal the new provision through legislation if the Federal Housing Finance Agency did not do so itself. pass.
“These changes violate the fundamental principle of risk-based pricing, which is that lower-risk borrowers should pay lower prices to access credit than higher-risk borrowers,” the two chairmen wrote in their letter to FHFA director Sandra Thompson.
“This new tax also fails the basic test of fairness by punishing borrowers who act responsibly, and will in turn incentivize homebuyers to reduce their down payments and take on additional debt.”
Patrick McHenry, chairman of the financial services industry, above, and Warren Davidson, chairman of the housing and insurance subcommittee, sent a letter Tuesday demanding that the Biden administration roll back changes that increase mortgage costs for homeowners with good credit to help those with offset a riskier credit
McHenry and Davidson, above, said they would move to legislate to repeal the provision if the Federal Housing Finance Agency did not do so itself.
When a person takes out a mortgage, the rate they pay is determined by both the interest rates set by the Federal Reserve and the loan-level price adjustment. The loan-level price adjustment functions like a car insurance policy that goes up after an accident – the riskier the borrower, i.e. those with bad credit, the more they pay.
A May 1 rule change is designed to compensate low-credit borrowers who pay more for their mortgage. They still pay more than those with good credit, but less than before.
To make up for lost revenue, borrowers with strong credit — 680 and above — could pay about $40 more per month on a $400,000 mortgage. Homebuyers who put down 15 to 20 percent down payments will be hit by the biggest rate changes.
In their letter, the senators poked holes in the FHFA’s reasoning for the rule: “Your proposal erroneously assumes that creditworthiness is only achieved by only the wealthy, blatantly ignoring the countless lower-income Americans who have shown of exceptional financial responsibility. By confusing credit scores with wealth, you not only grossly oversimplify a complex issue, but you also perpetuate a false narrative that unfairly slanders hard-working lower-income citizens.”
New rates only affect those who buy a home after May 1.
The Federal Housing Finance Agency (FHFA) regulates federal mortgage guarantee giants Fannie Mae and Freddie Mac, meaning most people with mortgages will be affected.
The housing market has already been hit hard as the Federal Reserve raises rates to try to stave off inflation – mortgage rates have risen to more than 6 percent.
FHFA director Sandra Thompson says the rule change serves to “increase price support for borrowers who are constrained by income or wealth.” She said overall fee changes would be “minimal” and ensure market stability.
The Federal Housing Finance Agency proposed a series of rule changes on April 19, focusing on “fair lending, fair housing, and fair housing financing plans.” That included adding requirements for lenders to address the minority homeownership gap.
In the fourth quarter of 2022, white homeownership was 74.5 percent, while black homeownership was 44.9 percent.
The stated goal for encouraging home ownership among minorities was to generate wealth in those communities.
Lenders rely on credit characteristics to determine mortgage accessibility and rates. Black home loan applications are currently rejected at a higher rate than any other ethnic group in the country.
Neighborhoods with higher black populations are also seeing lower home prices, FHFA notes.