Biden’s Bold Mortgage Plan Sparks Debate: Will Housing Prices Skyrocket or Plummet?
The Federal Housing Finance Agency passed a new rule on Monday, May 1, with the intention of making it more affordable for first-time homebuyers, lower-income borrowers and high-risk borrowers to get a conventional mortgage loan to buy a home. However, the rule could also raise the mortgage payments of some borrowers with good credit by more than $60 per month.
Fannie Mae and Freddie Mac follow a Loan-Level Price Adjustment (LLPA) matrix to set risk-based fees for loans they purchase from lenders. These fees vary based on the buyer’s credit score, loan-to-value ratio, type of loan product and other factors, according to the FDIC, and they’re typically reflected in interest rates, with higher-risk borrowers paying more.
The newly designed LLPA matrix for single-family homes increases fees across the board, on low-risk and high-risk borrowers alike. However, some borrowers with high credit scores and at least 25% down who previously didn’t have to pay any LLPAs will now have to pay if their loan-to-value ratio is less than 60%.
A buyer with a credit score of 750+, for instance, who puts down 25% would pay 0.375% in fees, compared to 0.25% previously. But a buyer with a credit score of 659 in the same example would now pay 1.5% in fees compared to 3% under the old rules.
Some real estate experts believe that making it easier for high-risk borrowers to obtain credit could lead to more foreclosures, a tighter housing market and potentially, a crash.
“This new rule unfairly penalizes Americans for having good credit and rewards those who accrue debt and don’t pay their bills with cheaper loans,” Rep. Michael Lawler (R-N.Y.) recently told Newsweek.
But will it expand housing access as some hope? It might make it easier for some homebuyers to get a conventional mortgage, which is typically more affordable than the FHA-backed loans already available to less-qualified borrowers. But increased competition for homes, especially in the low- to mid-range markets, could lead to home prices rising as inventory falls.
With the spring buying season at hand and housing inventory tight, it’s likely the short-term effect will be an increase in home prices as more buyers compete for the same homes.
However, in the long term, fewer fees and more high-risk buyers could ultimately reduce home prices in some areas.
Some experts foresee a flurry of foreclosures following the new rule. “We learned the hard way [in 2008] that if you can’t afford a home, just getting a subsidy one time to get a mortgage, you won’t be able to carry it,” former National Economic Council director Larry Kudlow told Fox News.
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If foreclosures occur, as they did in 2008, it would expand the existing home inventory and drive prices down. Lawler shared what, in his opinion, would be a better way to reduce the cost of buying a home and expand access to many Americans who have given up on the dream of home ownership. “The way to expand access to housing isn’t to reward bad credit — it’s to bring down inflation, reduce property taxes, cut energy costs and invest in critical infrastructure,” he told Newsweek.
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