New mortgage rules set by the Biden administration could increase fees for borrowers with good credit to offset costs for less qualified buyers. The new rules took effect Monday and spawned memories of the 2008 financial crisis that was kicked off in part by the collapse of subprime mortgages.
“The fact that a proposal flaunting credit risk is being openly pushed by FHFA just a decade-and-a-half after the housing-led 2008 financial crisis is staggering,” read a letter written by a group of senators led by GOP Senators Roger Marshall of Kansas, and Marco Rubio of Florida, to Sandra Thompson, Federal Housing Finance Agency (FHFA) Director, last week.
The letter comes as the FHFA’s new rules went into effect Monday, permitting borrowers with lower incomes to qualify for lower fees, but could result in higher fees for those with higher incomes or credit ratings.
The plan has been met with intense pushback from several leaders in the mortgage industry, with experts predicting that borrowers with a credit score greater than 680 could expect to pay an additional $40 per month on a $400,000 mortgage.
The fees are designed to help mitigate the risk of lending to riskier borrowers, who may often face difficulty qualifying for beneficial terms that would allow them to attain homeownership.
Plans to broaden the ability of lower-income borrowers to qualify for mortgages have been attempted before, including before the 2008 financial crisis; from the early 1990s until the mid-2000s, government regulations to relax mortgage underwriting standards to promote homeownership led to growth in subprime mortgage lending. However, the rising interest rates through the mid-2000s left several underqualified buyers unable to pay back their loans, leading to a deluge of defaults many experts believe began a prolonged recession.
Although the current rules may not rise to the level of one of the worst financial crises in U.S. history, they could generate yet another batch of unintended consequences for the economy.
“It certainly is a lurch in that direction,” said Richard Stern, director of the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation. “I wouldn’t even say it’s the first step, but it’s another large step down that direction…to cause a very similar kind of crisis.”
Several regulations were enacted after the 2008 financial crisis to prevent a repeat of similar circumstances.
Numerous regulations were enacted after the 2008 crisis in an attempt to avoid a repeat of similar circumstances. However, many conditions that sparked the crisis threaten again today. Interest rates have risen steadily over the past year, while home prices have sharply increased since leveling off in 2020.
According to Stern, rules such as those put in effect this week increase the risk of a crisis because they “muddy the waters” for the financial system and make it increasingly difficult for lenders to calculate the threat of new loans precisely.
“What credit scores are there for us to make a realistic assessment of people’s ability to take out credit and make good on the loan,” said Stern. “It is utterly crucial for the entire financial system that be as accurate as possible.”
However, the new rules will “artificially” make it seem like people with lower credit ratings are “more creditworthy,” said Stern. He continued explaining that those with higher ratings will “look like they’re less creditworthy.”
“That is exactly what happened when it turned into the subprime mortgage crisis,” said Stern. “It’s creating a system where you can’t rely on the risk numbers, you can’t make any real predictions about what’s going on.”
In a statement, Sandra Thompson, FHFA Director, attempted to alleviate fears over the new rules last week, saying the new fees won’t “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,” said Thompson.
Instead, Thompson said the fee decrease would target borrowers with less money upfront, not lower credit scores. Meanwhile, increased fees will target “products such as second homes and cash-out refinances.”
Increased fees for refinance cashouts could also have a more significant effect on those with high scores, including those borrowers who frequently made enough payments to gain substantial home equity through years of on-time payments.
Although the agency is classified as an independent federal agency, Director Thompson was appointed by President Joe Biden.