Fannie, Freddie will raise some fees, lower others

The two biggest sources of mortgages for American home buyers plan to raise their base fees to counter what they see as continuing “adverse conditions” in the real estate marketplace.

At the same time, however, Fannie Mae and Freddie Mac – which currently fund more than three-quarters of all new home loans – also plan to selectively reduce fees for applicants whose likelihood of default and foreclosure appear to be lower than the companies’ previous estimates.

The changes are being driven by what’s known as risk-based pricing. Factors such as your credit score, the size of your down payment and the type of loan you seek can push your expenses on a new mortgage up or down significantly – a difference of tens of thousands of dollars over the term of the loan.

Here’s what’s happening: As of Oct. 1 for new mortgages delivered to Fannie Mae, and Nov. 7 for loans delivered to Freddie Mac, baseline “adverse market” fees will be doubled, to half a percentage point from a quarter of a point – or to $500 per $100,000 borrowed from $250 per $100,000 borrowed. That applies to all home purchasers and refinancers, regardless of their individual risk characteristics.

The higher fees either will be paid upfront by borrowers or folded into the interest rate on their notes, adding about an eighth of a point to the rate.

On the flip side of the higher baseline costs is a series of risk-based pricing changes keyed to individual borrowers’ scores and down payments. Both companies now plan to reduce fees for borrowers with high FICO credit scores – 720 and up – who make down payments of less than 15%. These borrowers will be quoted credits of one-quarter of a percentage point – amounting to cuts in their fees – at the application stage.

At the same time, borrowers with FICO scores below 720 and down payments of less than 15% will be charged quarter-point higher fees upfront. Why? Credit scores never have been more powerful in determining the rates and fees home buyers pay on their loans. Even more important, credit score standards are being raised dramatically.

During the housing boom years, the dividing line between subprime applicants and borrowers who got better rate quotes was a 620 FICO. A 700 score was a virtual guarantee of the best quotes available. Fair Isaac Corp.’s FICO scores range from about 300 – the highest risk – to 850, the lowest risk. Now, even FICO scores in the upper 600s and low 700s are subject to higher fees in some cases.

For example, if you get a loan destined to be funded by Fannie, and you have a 739 FICO score and a down payment of 20% to 25%, you’re likely to be stuck with a quarter-point fee increase.

You might protest: Since when is a FICO of nearly 740 not deserving of the lowest fees? Fannie’s implicit answer through its revised risk-based pricing system: A 739 FICO no longer makes the highest grade when the applicant can’t make a 30% or 40% down payment. Worse yet, if your FICO below 720 and don’t have at least a 30% down payment, you’re going to get hit with a half-percentage point delivery fee.

In an interesting twist, people making the lowest down payments – but who have credit scores above 720 – can expect fee decreases of a quarter-point. Isn’t that counterintuitive, since default risks rise as down payments shrink?

Yes, but in Fannie and Freddie’s world, all loans with 20% or smaller down payments require private mortgage insurance and both insurers have decided that they can charge a little less on such loans because the insurance lowers their risk of serious loss.

That’s good news for moderate-income first-time buyers with sterling credit who don’t have a lot of cash for a down payment.

Ken Harney can be reached at kenharney@earthlink.net.