As I wrote about last month, housing policy has been thrust into the center of the culture wars. It’s disheartening to witness bipartisan support for expanding homeownership, a cornerstone of the American Dream, devolve into a heated debate over “wokeness.” This unwarranted escalation detracts from the real issues at hand and should not continue. We need to have a serious, fact-based discussion of how we price government-sponsored mortgages, like those purchased by Fannie Mae and Freddie Mac, as well as those insured and guaranteed by the U.S. government, like those by the Federal Housing Administration (FHA)/Ginnie Mae.
Together, these two channels make over 70% of the mortgage market and present different types of risk to borrowers, investors and taxpayers. It’s worth getting right. The Federal Housing Finance Agency (FHFA) should lead this discussion among the broadest possible range of stakeholders and revise the pricing grid to maximize the fairness, safety, and soundness of government mortgages. The approach also needs to be transparent and easily understood.
One of the arguments made by opponents of the recent changes put in place by FHFA effective May 1 is that they penalize people who have better credit, or put more money down on a mortgage. Because the debate on this issue is dependent on the interpretation and comparison of highly complex mortgage pricing grids, it’s easy to mix fact and fiction without being intentionally untruthful.
Under the new pricing grid, the fact is that no one with the same downpayment and a higher credit score will be charged more than those with a lower credit score. It’s also true that under the new grid, no one who makes a higher downpayment will pay more than someone who makes a smaller downpayment, given the same credit profile. However, some of those who make a higher downpayment will be charged a slightly higher Loan Level Pricing Adjustment (LLPA) fee than those with the same credit profile who put less money down.
Wait a minute! Didn’t I just say the opposite? No. The difference is that when mandatory mortgage insurance is factored into the equation, the person with the higher downpayment won’t actually pay more than the one with the lower downpayment. This is why I have strongly defended FHFA’s effort to reduce fees on higher downpayment loans while also noting that critics are correct when they suggest that the charge is not risk-based pricing when higher-risk loans are charged less than lower-risk loans. Risk-based pricing like this is always going to treat someone unfairly because the current approach, instituted in 2009, is always going to be unfair to someone.
I believe the answer is to get rid of the LLPAs altogether. Many of my colleagues in the mortgage industry agree with me while others don’t. This is a discussion we should have with our nerdy charts at the ready, not in op-eds, soundbites, or talking points for lobbyists.
One reason this issue is so important is that without help, well-qualified, moderate- and middle-income Americans will not be able to become homeowners. This doesn’t just hurt them. It also creates an imbalanced rental market that drive up rents. The impediments to homeownership haven’t been higher in generations. According to data from the Federal Reserve Bank of St. Louis, when I bought my first home in 1991, the median income in the U.S., adjusted for inflation, was $58,607 and the median home price was $120,000 – roughly a 2:1 ratio. Today the median income is $70,000, but the median home price is $436,800. Today’s median home price is over $100,000 more than before the pandemic, just three years ago. So, a 20% downpayment in 1991 of $24,000 is over $87,000 today – more than three times as much and an income-to-home price ratio of 6:1!
The average buyer puts just 13% down on a house, not 20%. That figure drops to 8% for buyers below the age of 30. If we want people in their 20s and 30s to become homeowners, we are going to have to stop acting like the angry old man on his porch, yelling “get off my lawn.” We also must stop pretending that everyone buying their first home is doing it by pulling up their bootstraps. The reality is that many of them benefit from multigenerational wealth, often built by multigenerational homeownership, in the form of parental support, what I like to call the “Daddy Downpayment Program.” I got this help, and I’m grateful for it. Just because I was born on second base, doesn’t mean I get to brag about hitting a double, to paraphrase former Oklahoma football coach Barry Switzer.
We also have to be honest about why the homeownership rate for Blacks, Latinos and Asian Americans is so far behind White homeownership. Over a century of housing discrimination has contributed to a gaping wealth gap. Most Americans build wealth primarily through housing. But if one’s parents and grandparents were denied this wealth, they are hardly able to help their children with financial support, information and experience. The data is clear and unequivocal.
As a recent letter from the Housing Policy Center to FHFA regarding additional fees on higher debt-to-income ratios said “the Racial Equity Gap persists across income bands: 72% of Black and 76% of Hispanic purchase customers are non-LMI, and 55% of Black and 61% of Hispanic purchase customers have income that exceeds 100% AMI.” HPC went on to show that for mortgage customers with incomes below $50,000, “for every 100 white homeowners, there are ~51 Black homeowners, ~70 Asian homeowners and ~59 Hispanic homeowners,” whereas for customers with incomes above $150,000, for every 100 white homeowners, there are ~88 Black homeowners, ~90 Asian homeowners and ~88 Hispanic homeowners.” NHC has joined HPC and the Mortgage Bankers Association in calling for a repeal of this fee, which is also under consideration by FHFA.
I’m not arguing that anyone get anything I didn’t get. But let’s be fair and give everyone the same opportunities we had. We don’t have to keep playing the same game with a stacked deck.
Risk-based pricing through LLPAs have outlived their purpose. Guarantee fees on loans purchased by Fannie Mae and Freddie Mac are the appropriate mechanism for investors to pay for guarantees on the timely payment of principal and interest on mortgage-backed securities, ensuring a liquid and efficient market. To create a fair playing field for first-time homebuyers across all income levels, Fannie Mae and Freddie Mac should charge the same fee for everyone, as was the practice between 1938 and 2008, and as FHA loans do today.
Not everyone may agree with that, but I believe most people on both sides of this issue agree that mortgage pricing should be fairer and better able to incentivize success in homeownership. No one wants the American Dream to turn into a nightmare as it did during the Financial Crisis. It’s a debate worth having, as long as we do it with facts and reason.