Is There Really a New, Unfair Mortgage Tax on Those With High Credit?

If it bleeds, it leads!

Seemingly overnight, the internet is up in arms with news regarding a "new," unfair tax on mortgage borrowers with higher credit scores. Some have gone so far as to suggest that someone could intentionally lower their credit score in order to get a better deal.

Before you stop paying your bills in the hope of cashing in, let's separate fact from fiction. First and most importantly, you will absolutely NOT get a better deal on a mortgage rate if your credit score is lower, even if your nephew just texted you a screenshot of a news headline saying "620 FICO SCORE GETS A 1.75% FEE DISCOUNT" and "740 FICO SCORE PAYS 1% FEE."

So why would someone make such a claim?

This all has to do with changes to Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac (the "agencies''), the two entities that guarantee a vast majority of new mortgages. LLPAs are based on loan features such as your credit score and the loan-to-value ratio among other things. They've been changed several times over the years and a fairly substantial change was announced in January of this year.

Wait... This news is from JANUARY?! Why are people talking about it now?

People are confused because they don't understand how "delivery dates" work when it comes to Fannie and Freddie. I will also throw in that it was likely a slow day in the news cycle.

Changes that impact fees and guidelines are almost always implemented based on the date the loan in question is "delivered" to Fannie/Freddie. "Delivery," in this context, typically occurs a matter of weeks AFTER the loan is closed, although it can be more than a month.

Now consider that a closed loan has often been quoted and locked for more than 3 weeks—call it a month to be safe. Since these changes go into effect on loans delivered on or after May 1st, 2023, lenders began to implement them weeks ago. Many lenders implemented them months ago—especially for loans that are locked for longer periods of time.

So low credit borrowers are already getting a discount while high credit borrowers pay more?

Not exactly, and this is where the confusion comes in. Also, from here on out, please note that there is no opinion offered here as to whether this is good/bad/etc. These are just the facts.

The fact of matter is that LLPAs are indeed changing in a way that improves costs for those with lower credit scores and increases costs for those with higher credit scores (in many cases, anyway). But people are confusing the CHANGE for the ACTUAL cost.

So a low credit borrower isn't paying less than a high credit borrower? The gap between what they pay is just smaller than it was?

YES! The change amounts to a tweak of an existing fee structure in favor of those with lower credit scores and at the expense of those with higher credit scores, but there's no scenario where someone with lower credit will have a lower fee. In other words, don't go skipping those credit card payments in the hopes of getting a lower rate.

Yes, it's a big change, so why is the government doing this to people with higher credit?!

Fannie and Freddie technically have a "mission" to promote affordable home ownership. Here is the statement on the topic by their regulator, the FHFA: FHFA Announces Updates to the Enterprises’ Single-Family Pricing Framework.

Any other misconstrued news I might have seen?

Yes there actually is! While not as viral as the LLPA stuff, there has been a fair amount of press on a new 40yr FHA mortgage. The idea of a 40 year mortgage has been floated around for years. I remember it most during the great recession of 2008-2011. I actually think a 40 year loan is a great way to combat the affordability challenges we have here on the coasts. Japan has used a similar tool for years.

However, THERE IS NO NEW 40yr FHA LOAN! Lenders who collect payments on FHA loans have a new option to offer loan modifications with terms of 40 years to borrowers who are unable to pay their existing FHA loans. In my experience, modifications rarely happen. So even if you are going for a loan mod, you have a 1 in 10 chance of receiving something meaningful. I wish I had better news on this front.