Mortgage Rates Stable as New Fee Structure Goes Into Effect

The average 30-year fixed-rate mortgage rate was slightly lower than last week at 6.92%. The majority of longer-term mortgage rates have retreated, while the rates for shorter-term loans and adjustable rate mortgages are slightly higher.

As of April 27, here are the current mortgage interest rates without discount points, unless otherwise stated:

30-year FHA loan: 5.95% plus 0.06 points (down from 6.08 percent a week earlier).

The housing market appears to have stabilized in terms of sales and prices. Borrowers who want to buy a house should welcome the prospect of lower mortgage interest rates for the rest of the year.

• Sam Khater Freddie Mac’s Chief Economist, in a statement on April 27,

Indicator of The Week: Decoding the new 'unfair' mortgage fee

Internet reports have been flooded with stories about a new fee on mortgages that unfairly penalizes homebuyers who have good credit. While the Federal Housing Finance Agency (or FHFA) did update its pricing structure recently, it is not necessarily a new charge, and there is likely less impact on creditworthy borrowers than has been suggested.

The FHFA oversees Fannie Mae, Freddie Mac and other mortgage giants that together guarantee the majority of U.S. home mortgage loans. After the 2008 housing crash, FHFA implemented a loan-level pricing adjustment (LLPA) to reduce mortgage lender risk. Its core is that it increases fees for borrowers who have poor credit or low down payments. On the other end of the spectrum, those who have good credit and make a large down payment are likely to pay the lowest possible fees.

Jiayi Xu, Realtor.com's economist, says that while it is technically a fee upfront, lenders usually convert it to the interest rate of the mortgage. This means that borrowers will pay it over the course of time.

In January, the agency announced that it would update its LLPA Matrix in order to make homebuying affordable for those who have fair credit scores and a high ratio of loan-to value - like first-time buyers with low downpayments. FHFA Director Sandra L. Thompson said that the measure would help "ensure (Fannie Mac and Freddie Mac), advance their mission to facilitate equitable and sustainable homeownership."

FHFA increased costs for certain borrowers to accommodate the fee change. These borrowers include those with credit scores between 680-760 and an LTV of 75%-95%. Xu explains that "the new LLPAs subsidize borrowers with low credit scores by charging higher rates to those who have high scores." This raises concern about the affordability impact for middle-class homebuyers and repeat buyers. Since current homeowners have no incentive to sell their homes, increased mortgage costs could further reduce the supply of houses for sale.

Some lenders have already started updating their interest rates, fees and other charges to reflect this change. The interactive table below shows how fees have changed.

We'll use real-world examples in order to determine who will see the biggest changes in borrowing costs. Xu estimates a homebuyer who has a credit rating of 659 and a $400,000 mortgage, with a 20% deposit, could save $3,000 on closing costs. A well-qualified borrower who has a credit score of 739 would pay $2,000 extra than before. The lower-credit borrower will still pay a 2.5% LLPA while the higher credit borrower pays just 1%.

It's important to distinguish. Homebuyers who have higher credit scores or larger down payments still get LLPAs that are much lower than those who do not. The new fee matrix only narrows the gap in mortgage fees between these homebuyers.

The LLPA has declined for all credit levels, even those with high credit scores over 780. LLPAs for those who have made large down payments (above 40%) or for all borrowers has decreased or remained the same. In the chart below, you can see the impact of a borrower’s FICO score and LTV on their mortgage costs.

But the changes do not end there. Thompson says that the FHFA had also planned to implement an additional LLPA that took into account a borrower’s debt-to income ratio. However, this change was delayed until August because the agency “received input from mortgage industry stakeholders regarding the operational challenges associated with implementing a DTI-ratio-based fee,” Thompson states. Bob Brokesmit is the president and CEO of Mortgage Bankers Association. He writes in a post on their blog that a DTI based LLPA fee would be "unworkable".

Brokesmit says that the DTI fee is a way for lenders to manipulate the market, which will make consumers believe they are constantly changing the rules. This could undermine the trust between the borrower and lender. For lenders, confirming multiple changes to the DTI at the underwriting stage would present a number of operational and compliance problems, which would require extensive training, and updating of processes and technology.

FHFA still plans to move forward with its plan, even though the debt-to income ratio of a borrower won't be taken into account in the LLPA fees. The three-month extension was intended to allow lenders "enough time to deploy the fees" while the agency meets with stakeholders to address their concerns. We'll continue to monitor mortgage rates closely in the interim, and see if the new LLPA fees have an impact.

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