Fannie Mae Is Making STRONG Borrowers SUBSIDIZE WEAK Borrowers
In what was one of many failed social experiments of the 1970s, my high school in AZ did not enforce attendance.
And – needless to say – with ample sunshine and many recreational activities (the school was a veritable country club) on campus and nearby, most of my friends and I rarely attended class.
So, you can imagine my delight when the school announced one day that they were going to raise my pathetic grade point average at the expense of all the kids who did attend class and actually study.
It was only fair the school thought to lower the hard-working kids’ grades so the school could better reward the kids like me who did little to no work.
AND… I of course made up the “grade equity” story (the “no attendance” part is true) to illustrate a point: Fannie Mae and Freddie Mac are doing the exact same thing!
Fannie and Freddie are now raising rates for strong borrowers to subsidize weaker borrowers.
I actually blogged about this in February: Fannie Mae Is Raising Rates for STRONG Borrowers. But, the actual implementation of the new policy was a few months off, so few people took notice.
Not so much now, as there have been a rash of newspaper and social media headlines complaining about how ridiculous the new policy is.
This WSJ editorial is just one example: Upside Down Mortgage Policy.
Long story short: buyers with large down payments (20% or more) and higher credit scores will now have higher rates.
So – mortgage lenders literally have to go back to the borrowers we pre-approved several months ago and say… “uhhhh, sorry, I know you worked hard to save and have perfect credit, but your rate is now higher because of a new government policy and not because rates went up…”
The way Fannie and Freddie will raise rates for strong borrowers is by changing the fees they charge every borrower for every loan – with those fees worked into the interest rate.
The formal name for those fees is “Loan Level Price Adjustments” or “LLPAs” and I blogged about them recently too: Fannie Mae’s Greatest Hits! (the “hits” are the pricing adjustments, and I highly recommend reading that blog).
The interest rates for many “strong borrowers” will now be anywhere from 1/8% to as much as 1/4% HIGHER than they otherwise would be – if Fannie and Freddie had not imposed these changes.
So why are Fannie and Freddie imposing this new policy when virtually everyone in the industry is opposed to it?
Because they can. Fannie and Freddie are effectively owned and run by the government.
The Biden administration is telling the world that this will make it easier for the less privileged to buy homes.
But cynics are calling it another vote-buying scheme and/or a wealth distribution scheme.
What is wrong with the policy?
- It is unfair. It is charging responsible people more to pay for less-responsible people;
- Taxpayers are already subsidizing weaker borrowers with HUD’s FHA program;
- It creates disincentives for responsible behavior; and
- It is effectively another subsidy that will drive more demand and only increase prices! This is the most frustrating factor, as our policymakers never seem to understand that subsidies just push up prices – every time and all the time – when what we really need is more incentives to increase the SUPPLY of homes.
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