Key Facts:
- In January 2023, the Federal Housing Finance Agency (FHFA), an independent regulatory agency, announced a new pricing framework for Fannie Mae and Freddie Mac, two mortgage companies under FHFA conservatorship, effective May 1, 2023.
- The new pricing framework will change what the agency calls upfront fees, or payments homebuyers make when they close on a property. Those fees are based on "risk characteristics of the borrowers and the loans they are obtaining," which can include credit scores.
- Generally speaking, under the new rule some people with higher credit scores will pay more in fees than those in similar situations under the old rule. Conversely, people with lower credit scores will pay less. And even those with higher credit scores will pay less once the new plan takes effect.
- Rumors that U.S. President Joe Biden was pushing for, or had introduced, these changes were not supported by evidence. Moreover, the White House rejected that claim. There was no congressional measure or executive order related to the changes, and, based on our research, Biden had not publicly commented on the FHFA's decision to change the fee structure.
In April 2023, numerous articles and social media posts claimed U.S. President Joe Biden was changing how much money homebuyers will pay when they're closing on a property based on their credit scores. "The Biden administration raises mortgage payments for good credit & higher down payment homebuyers starting May 1st, in order to foot the bill for high-risk mortgage borrowers with lower credit scores & lower down payments," claimed one tweet.
The rumors were based on real changes to what the Federal Housing Finance Agency (FHFA) calls "upfront fees," or fees borrowers pay when they're closing on a mortgage that are meant to cover the lender's expenses. According to Redfin, a real estate company, upfront costs include "earnest money, the inspection fee, and the appraisal fee." The changes – which we unpack in detail below – will take effect May 1, 2023..
However, the Biden administration was not forcing the adjustments via legislation or an executive order, and it was unknown if, or to what extent, the president supported them, or had a hand in them being implemented. "The White House does not direct the actions of independent agencies," a White House spokesperson told Snopes. "I can also confirm that the President has not spoken about this issue." Similarly, Adam Russell, senior communications specialist at the FHFA denied that Biden had instructed the agency to make the changes.
Many of the social media posts making the claim referred to reporting by the Washington Times, which wrote that the new federal rule by the FHFA would force homebuyers with good credit scores "to pay higher mortgage rates and fees to subsidize people with riskier credit ratings who are also in the market to buy houses." We reached out to one of the experts quoted by the Washington Times, Ian Wright, for an explanation of how the new fee structure "penalized" borrowers with good credit scores and larger down payments. He did not respond to our questions.
Some housing experts questioned the assertion that the new plan penalizes borrowers with good credit to subsidize those with poor credit. Jim Parrott, nonresident fellow at the nonprofit research organization Urban Institute, and Janneke Ratcliffe, vice president for housing finance policy at the institute, wrote:
"Some have suggested that the decline in fees for borrowers who put down a smaller down payment shows that FHFA is overcharging those who pose less risk to the government-sponsored enterprises (GSEs) so that it can undercharge those who pose more risk. But as we pointed out, this ignores the role of mortgage insurance, which every borrower who puts down less than 20 percent must purchase. This mortgage insurance moves some of the risk from Fannie Mae and Freddie Mac to a private mortgage insurer, which allows the GSEs to charge a lower loan-level price adjustment (LLPA). But the borrower, of course, pays a fee for the mortgage insurance."
Generally speaking, it is true that some people with higher credit scores will pay more in fees than they would have prior to the new rule taking effect. Conversely, some people with lower credit scores will pay less. But even some of those with higher credit scores will pay less once the new plan takes effect. Claims that the increases would directly offset decreases in fees for people with lower credit was a misleading interpretation of the restructured fee system.
FHFA Says Changes Aim to Create 'Equitable and Sustainable Access to Homeownership'
The new fee structure, which is broken down not only according to homebuyers' credit scores but also down-payment categories, fee percentages, and property types in Fannie Mae's Loan-Level Price Adjustment Matrix, will be applicable to all home loans with terms greater than 15 years.
The FHFA announced the changes on Jan. 19, 2023, as a sequel to an October 2022 move by the FHFA to eliminate the fees altogether for some first-time homebuyers. All in all, the agency said, the adjustments aim to give people from various backgrounds "equitable access to affordable and sustainable housing."
"By locking in the upfront fee eliminations announced last October, FHFA is taking another step to ensure that the Enterprises advance their mission of facilitating equitable and sustainable access to homeownership," said FHFA Director Sandra Thompson in the January statement. The "enterprises" referred to are Fannie Mae and Freddie Mac, the mortgage financing companies. Fannie Mae and Freddie Mac are shareholder-owned companies created by congressional charters in 1938 and 1970, respectively.
In October, upfront fees were eliminated for first-time homebuyers "at or below 100 percent of area median income (AMI) in most of the United States and below 120 percent of AMI in high-cost areas."
AMI is "the midpoint of a specific area's income distribution and is calculated on an annual basis by the Department of Housing and Urban Development (HUD)." In other words, half of the households have income higher than the median and the other half have less than the median income.
So, if a first-time homebuyer with an income at or below 100% of AMI in most areas of the United States were to buy a home, say, in an area with $60,000 AMI, the buyer would not have to pay the upfront fees at all if their household income is below $60,000.
Similarly, if a buyer were trying to buy a home in a high-cost area, say with an AMI of $100,000, they would not have to pay the upfront fees at all if their income is below $120,000. According to Consumer Financial Protection Bureau(CFPB), a federal agency responsible for protection of consumers in financial matters, low-income households are those that earn less than 50% and upper income households are those that earn more than 120% of the median. (Fannie Mae provides an Area Median Income Lookup Tool so people can check the AMI of their own neighborhoods.)
Although home ownership in the United States has continually increased over the past decade, it is still the case that not everyone has access to affordable housing. Experts in the real estate industry say people of color, in particular, "face major homebuying challenges."
According to the National Association of Realtors, the home ownership rate "among Black Americans lags significantly (44%), has only increased 0.4% in the last 10 years and is nearly 29 percentage points less than White Americans (72.7%), representing the largest Black-White homeownership rate gap in a decade." The association also said Black homeowners and renters are more cost-burdened than any other racial group. The FHFA's updated housing finance plans are an effort to mitigate these disparities, the agency says.
The changes have generated fierce criticism from conservatives. In a letter to FHFA Director Thompson on April 26, 2023, 16 Republican U.S. senators signed off on criticisms of the new fee structure, saying "far-left proposals like these set a dangerous precedent." They further wrote, "This shortsighted and counterproductive policy demonstrates a profound misunderstanding of the necessity of accurately tailoring housing finance products to credit risk and establishes a perverse incentive that punishes hardworking Americans for their fiscal prudence."
Here's What the New Fee Structure Would Look Like, Per FHFA
The GOP senators' letter came a day after FHFA's Thompson issued a statement citing "a fundamental misunderstanding about the fees charged by the [Fannie Mae and Freddie Mac] Enterprises, and why they were updated."
In that statement, Thompson sought to "address some of these misconceptions directly." Here are the main issues she pointed out:
- Higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less. The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.
- Some updated fees […] do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.
- The new framework does not provide incentives for a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20 percent of the home's value typically pay mortgage insurance premiums, so these must be added to the fees charged by the Enterprises when considering a borrower's total costs.
- The targeted eliminations of upfront fees for borrowers with lower incomes – not lower credit scores – primarily are supported by the higher fees on products such as second homes and cash-out refinances.
- The changes to the pricing framework were not designed to stimulate mortgage demand.
Thompson noted that fees would increase for buyers in some categories and decrease for those in others, but that "[t]he updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment." We looked into some test cases.
For example, those borrowers in the credit score range of 720-739 who plan to make a down payment of 20% on the home value would see a fee increase from 0.750% (under the old structure) to 1.250% (under the new plan effective starting May 1, 2023). So, a borrower in that credit score range making a down payment of $80,000 (20%) on a home value of $400,000 would now have to pay an upfront fee of $4,000 (1.25%) on the loan of $320,000 (80%). Under the old plan, that fee would have been $2,400 (0.75%).
But some buyers with higher credit scores, depending on other factors, would see a decrease in upfront fees. For instance, borrowers who have a credit score of 780 or above and who plan to make a down payment of 20% on a home's value would see their upfront fees reduced from 0.500% under the old plan to 0.375% under the new one. So, a borrower in the highest credit score category making a down payment of $80,000 (20%) on a home value of $400,000 would now have to pay an upfront fee of $1,200 (0.375%) on the loan of $320,000 (80%). Under the old plan, that fee would be $1,600 (0.500%).
Additionally, the new plan makes it easier for those with a poorer credit score (639 or below) to buy homes, even with a down payment of 5% or lower. The new fee for buyers in that category is 1.750%, down from 3.250%. The new upfront fee for such buyers is still the highest one when compared with borrowers with better credit scores but their fee would be lower than fee that the borrowers who make a down payment between 5% and 30%.
Additionally, the new plan makes it easier for those with a poorer credit score (639 or below) to buy homes, even with a down payment of 5% or lower. The new fees for buyers in that category is 1.750%, down from 3.250%. However, despite the new plan making it easier for borrowers with scores in that range to get a loan, they still end up paying higher upfront fees than those borrowers making a similar down payment but with higher credit scores.
This example from CNN's Anna Bahney, who covers investments and real estate, illustrates that point:
The fee will still cost the home buyer with the lower credit score more.
A buyer with a 640 credit score and an 80% loan-to-value ratio will have a fee of 2.25%, while a buyer with a 740 score will have a fee of 0.875%. The difference in assessed fees is about $4,000 more for a buyer with a 640 credit score than for a buyer with a 740 credit score, based on a $300,000 mortgage.
See Fannie Mae's Loan-Level Price Adjustment Matrix for a breakdown of real-world pricing scenarios across a range of credit scores and other factors.