Did you hear that sound? That’s the entire mortgage industry shouting, “hip, hip hooray!” The Federal Housing Finance Agency (FHFA) on Wednesday announced that it would rescind a controversial loan-level pricing adjustment (LLPA) for conventional borrowers with debt-to-income (DTI) levels at or above 40%.
The FHFA, which regulates Fannie Mae and Freddie Mac, had previously delayed implementation of the DTI LLPA from May 1, 2023 to August 1, 2023 following a chorus of upset from mortgage industry stakeholders, including the influential Mortgage Bankers Association (MBA).
Mortgage industry lobbyists and practitioners alike complained that the fee was “unworkable” and would result in logistical and compliance nightmares, as well as confusion and mistrust from borrowers.
“I appreciate the feedback FHFA has received from the mortgage industry and other market participants about the challenges of implementing the DTI ratio-based fee,” FHFA Director Sandra Thompson said in a statement on Wednesday. “To continue this valuable dialogue, FHFA will provide additional transparency on the process for setting the Enterprises’ single-family guarantee fees and will request public input on this issue.”
The FHFA also put out a request for information on other new fees, including those imposed on borrowers with higher credit scores and moderate down payments.
In January, the FHFA announced a series of changes to LLPA fees with a revamped LLPA matrix that differentiates pricing by loan purpose, and a total of 81 grids for purchase loans, limited cash-out refi loans, cash-out refinance loans. Such changes prompted pushback from the National Association of Realtors and the MBA that it could hurt middle-wealth homebuyers and increase overall pricing.
The non-DTI-based fees went into effect officially on May 1 but practically have been in effect since mid-March.
The FHFA also had to battle misinformation along the way, with false claims spreading that lower-credit borrowers would pay less than better-credit borrowers.
Still, no LLPA fee elicited a stronger response than the new DTI requirement. Lenders argued they would not be able to accurately determine a borrower’s actual income before rates had to be locked, and the timeline didn’t allow them to change terms of the loan if new information came in later in the process, which happens frequently.
Following the FHFA’s announcement on Wednesday, the MBA issued a statement cheering the demise of the DTI LLPA.
“The proposed fee was unworkable for lenders and would have confused borrowers and undermined the customer experience,” the trade group said. “We are pleased that FHFA engaged with industry stakeholders, recognized the negative impacts of the fee, and decided to rescind its implementation. MBA urges FHFA to continue its engagement to improve clarity and transparency regarding the GSEs’ pricing framework.”
The National Association of Realtors, America’s largest trade organization, also applauded Sandra Thompson for reversing course on the DTI fee.
“It would have imposed a cost on borrowers at a time in the market when affordability is already stretched and only made them riskier,” NAR President Kenny Parcell said. “Likewise, the FHFA’s decision to release a request for information on the other changes is a great example of good governance.”
Likewise, the Community Home Lenders Association, a coalition of smaller lenders, said the scrapping of the DTI LLPA was good policymaking.
“The GSE pricing grid is a complex balancing of the objectives of access to mortgage credit for underserved borrowers and safety and soundness – and CHLA believes today’s action to end the use of DTI LLPAs will enhance those dual objectives,” said Scott Olson, the group’s executive director.
Days before the DTI fee was killed, National Housing Conference President and CEO David Dworkin argued in a post that the risk-based pricing model the FHFA relies on is antiquated and has outlived its 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,” Dworkin wrote. “To create a fair playing field for first-time homebuyers across all income levels, Fannie Mae and Freddie Mac should should charge the same fee for everyone, as was the practice between 1938 and 2008, and as FHA loans do today.”