The Federal Housing Finance Agency (FHFA) has altered the structure for setting the upfront premiums charged for issuing default insurance on mortgages backed by Fannie Mae and Freddie Mac. The mortgage insurance premiums, referred to as Loan Level Price Adjustments (LLPAs), are periodically adjusted to provide funds for HUD insurance extended to lenders to cover them against the risk of loss on foreclosure.
The most recent changes, effective May 1, 2023, have caused a stir among conservatives since borrowers with lower credit scores and lower down payments will be paying less in premiums under the new structure than they did under the old structure. Meanwhile, borrowers with high credit scores and 20% down payments are paying more under the new structure than they did under the old structure.
In response to claims that lower-risk borrowers with higher credit scores are actually subsidizing higher-risk borrowers with lower credit scores, the FHFA director Sandra Thompson released a statement saying these are misconceptions. For any given level of down payment, the updated premiums increase as credit scores decrease. A horizontal response to a vertical situation.
But that diversion from the subsidy issue still leaves borrowers with down payments between 5% and 25% paying more in premiums than those who put down less than 5% of the home’s value. That effectively makes the new mortgage premium structure no longer based on risk alone but instead based on wealth redistribution.
Even so, buyers who put down less than 20% of the home value will need to pay the premiums for private mortgage insurance (PMI), which indemnifies a lender against losses on a mortgage when a borrower defaults. [See RPI e-book Real Estate Principles, Chapter 60]
Thus, borrowers who put down less than 20% need to add these mortgage insurance premiums to the equation when considering the borrower’s total costs.
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American housing policy
Although politicized, the allocation of wealth highlighted by this most recent change in mortgage default insurance premiums is a continuation of American ideals of equality with basics available to all in this country, which social contract involves these sorts of transfers.
The FHFA says the changes to mortgage default insurance premiums is to support borrowers historically underserved by the housing finance market, according to a Fannie Mae letter.
Helping first-time homebuyers break into homeownership is part of our national housing policy. It’s the same type of earlier thinking put into practice in the 1950s: “A car in every garage and a chicken in every pot.” Personal wealth was not the qualifier, but sharing was.
The mortgage default insurance premiums are exactly what insurance is about, as everyone is responsible for paying. Health insurance requires a similar transfer of wealth since everyone is required to be insured, even the healthy.
The FHFA’s changes are just another American housing policy concept in play: more homeownership opportunities for more of our population.
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Want to learn more about PMI and mortgage payments? Click the image below to download the RPI book cited in this article.
