WASHINGTON — The two biggest sources of mortgages for American homebuyers plan to raise their base fees to counter what they see as continuing "adverse conditions" in the real estate marketplace.
At the same time, however, Fannie Mae and Freddie Mac — who fund more than three-quarters of all new home loans — also plan to selectively reduce fees for certain applicants whose likelihood of default and foreclosure appear to be lower than the companies' previous estimates.
The changes are being driven by what's known as risk-based pricing. Factors such as your credit scores, the size of your down payment and the type of loan you seek can push your expenses on a new mortgage up or down significantly, costing or saving you tens of thousands of dollars over the term of the loan.
Here's what's happening. As of Oct. 1 for new mortgages delivered to Fannie Mae, and Nov. 7 for loans delivered to Freddie Mac, baseline "adverse market" fees will be doubled from one-quarter of a percentage point to one-half a percentage point — from $250 per $100,000 borrowed to $500 per $100,000 borrowed. That applies to all home purchasers and refinancers, irrespective of their individual risk characteristics. The higher fees either will be paid upfront by borrowers or folded into the interest rate on their notes, adding about an eighth of a point to the rate.
Although the formal start dates for the higher fees are not until the fall, major lenders already are incorporating them into their current quotes and rate sheets. Neither company issued announcements of the jump in fees to the public, but sent e-mail bulletins to their lender partners instead.
On the flip side of the higher baseline costs is a series of risk-based pricing changes keyed to individual borrowers' scores and down payments. Both companies now plan to reduce fees for borrowers with high FICO credit scores — 720 and up — who make down payments of less than 15 percent. At the application stage, these borrowers will be quoted credits of one-quarter of a percentage point, amounting to cuts in their fees.
At the same time, borrowers with FICO scores below 720 and down payments of less than 15 percent will be charged upfront fees a quarter-point higher. Why? Credit scores never have been more powerful in determining the rates and fees homebuyers pay on their loans. Even more important, credit score standards are being ratcheted up dramatically.
During the housing boom years, the dividing line between subprime applicants and borrowers deserving better rate quotes was a 620 FICO. A 700 score was a virtual guarantee of the best quotes available, Fair Isaac Corp.'s FICO scores range from about 300, the highest risk, to 850, signifying the lowest risk. Now, even FICO scores in the upper 600s and above 700 are subject to higher fees in some cases.
For example, if you are applying for a loan destined to be funded by Fannie, and you have a 739 FICO score and a down payment between 20 percent and 25 percent, you're likely to be hit with a quarter-point fee increase that you wouldn't have been charged as recently as last month.
You might protest: Since when is a FICO of nearly 740 not deserving of the lowest fees? Fannie's implicit answer through its revised risk-based pricing system: Sorry, folks, but a 739 FICO no longer makes the highest grade when the applicant can't make a 30 percent or 40 percent down payment. Worse yet, if you've got a FICO score below 720 and don't have at least a 30 percent down payment, you're going to get hit upfront with a delivery fee of half a percentage point.
An interesting twist to the new series of pricing system changes: People making the lowest down payments — but with credit scores above 720 — can expect fee decreases of a quarter of a point. Isn't that counterintuitive, since default risks rise when down payments are smaller?
Yes, but in Fannie and Freddie's worlds, all loans with down payments of 20 percent or less require private mortgage insurance to protect the companies from the deepest losses associated with foreclosures. Now both companies have decided that they can charge a little less on such loans because the insurance lowers their risk of serious loss. That's good news for moderate-income first-time buyers with sterling credit who don't have a lot of cash for a down payment.
Not coincidentally, both companies are mandated by Congress to serve such creditworthy buyers, many of whom have lately been turning to the Federal Housing Administration (FHA) for lower-cost, low down payment mortgage deals.
Kenneth R. Harney can be reached at email@example.com.