The Biden administration has announced a new policy that will hike mortgage fees for Americans with good credit scores, while lowering them for those with bad credit. The move is intended to help more low-income and minority borrowers access homeownership, but critics say it will increase the risk of defaults and undermine the stability of the housing market.
According to the Department of Housing and Urban Development (HUD), the policy will adjust the pricing of mortgage insurance premiums (MIPs) for loans backed by the Federal Housing Administration (FHA). MIPs are fees that borrowers pay to protect lenders from losses in case of default. The FHA insures about 12% of all mortgages in the U.S., and typically serves borrowers who have lower incomes, lower credit scores, or smaller down payments than those who qualify for conventional loans.
Under the new policy, which will take effect on October 1, 2023, borrowers with credit scores above 680 will pay higher MIPs, while those with scores below 620 will pay lower MIPs. HUD estimates that the average borrower with a credit score of 720 or higher will pay an additional $1,400 over the life of a 30-year loan, while the average borrower with a credit score of 580 or lower will save $2,800.
HUD Secretary Marcia Fudge said that the policy is designed to “level the playing field” for borrowers who face systemic barriers to homeownership, such as racial discrimination, lack of generational wealth, or limited access to credit. She said that the policy will make FHA loans more affordable and accessible for millions of Americans, especially first-time home buyers and people of color.
However, some experts and industry groups have expressed concerns about the potential consequences of the policy. They argue that it will penalize responsible borrowers who have worked hard to maintain good credit, while subsidizing risky borrowers who are more likely to default on their loans. They also warn that it will create incentives for lenders to steer borrowers away from FHA loans and toward more expensive or predatory alternatives.
Additionally, some analysts say that the policy will increase the exposure of the FHA to losses, especially if the housing market experiences a downturn or a wave of foreclosures. They point out that the FHA already has a high delinquency rate of about 15%, compared to less than 3% for conventional loans. They also note that the FHA has a history of financial troubles, having required a $1.7 billion bailout from taxpayers in 2013 after its reserves fell below the minimum level required by law.
The Biden administration has defended its policy as a necessary and fair measure to address the racial and economic disparities in homeownership, which have been exacerbated by the COVID-19 pandemic and its impact on the housing market. The administration has also argued that its policy will not increase the risk of defaults or losses for the FHA, as it will be accompanied by enhanced underwriting standards, borrower education, and loss mitigation strategies.
The policy is expected to affect about 1.5 million borrowers per year, according to HUD. The agency has also announced that it will conduct a review of its pricing methodology every three years to ensure that it reflects the changing market conditions and borrower profiles.