Could that 3.5% down payment loan be overpriced?
MIAMI – April 9, 2014 – Fannie Mae and Freddie Mac, which buy mortgage loans from banks in order to spur more local lending, have boosted their requirements for mortgage insurance to buffer any losses if a homeowner goes into foreclosure.
However, Fannie and Freddie have a second system created to limit their risk – they add largely invisible fees to riskier loans, leading some critics to say the mortgage lending giants are punishing lower-income homebuyers by charging them more than necessary to limit risk.
It's also pricing some buyers out of the market.
"We're seeing significant declines in purchase applications because we have priced out a lot of Americans, especially in the under-$417,000 segment dominated by Fannie and Freddie," says David Stevens, CEO of the Mortgage Bankers Association, in an article written by Kenneth Harney.
Called "loan level pricing adjustments," one fee may be added to a borrower with a low credit score, while a separate fee could be added for a lower downpayment. Each fee then adds to the loan, effectively increasing the amount of money a buyer must pay each month.
According to Harney, the add-on fees can raise a borrower's interest rate from the mid-4 percent range higher than 5 percent. Zimmerman says the fees can increase the cost of a 5 percent downpayment loan on a $200,000 home up to 7 percent.
The key criticism of Fannie and Freddie's tactic isn't that they charge higher interest rates based on risk, or that they've raised the cost charged to borrowers for mortgage insurance – it's that they do both.
If borrowers have better and more expensive mortgage insurance, there's no need for Fannie and Freddie to levy a higher interest rate due to higher risk; alternately, if the higher fees are used to balance out the higher risk, there's no need to charge more for mortgage insurance.
Source: Miami Herald (FL) (04/04/14) Harney, Ken© 2014 Florida Realtors®