Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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Opinion: New LLPA changes represent noble effort, but wrong approach

There are other ways to help first time homebuyers and minority buyers without violating the principles of risk based pricing

On January 19, 2023, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac released their new pricing matrices as a response to the late year 2022 directive from FHFA on the subject. The effort is a noble one. The Federal Housing Finance Agency and the GSEs are improving pricing for lower FICO/ High LTV borrowers and consequently offsetting those price reductions elsewhere. Along the way they have impacted other cells in the matrix that have higher credit scores and lower LTVs with some increases as well as increases to things like cash out refinances and high balance loans. This cross subsidy effort to push the GSEs to provide better execution for first time homebuyers with lower scores, many of whom will be minority borrowers, has been called for by civil rights and consumer activists for years. 

The reality of the pricing restructuring is revolutionary and risky for the GSEs. In the past they would maintain a discipline of risk based pricing (RBP) according to the actual risk of the transaction and then would develop special programs outside the grid for first time homebuyers, minority buyers, or targeted census track and/or AMI levels. This is the first time that discipline has been openly rejected for a new cross subsidy methodology.

While noble, as I said, this is the wrong way to go about this. It threatens the very fundamental approach to pricing based on risk and could open the door for a variety of forms of price tinkering in the future. I have long argued that the GSEs should charge only for the true risk in the credit variables of a mortgage. I have personally pushed various regimes at FHFA to reflect the value of mortgage insurance, to not add fees to certain products or terms without credit risk justification, and to not use the GSEs as political instruments for other objectives. I argued this when Mark Calabria was director during the Trump administration and I do so today with the current director, nominated and confirmed during the Biden administration.

Precedent is a dangerous thing at times. This could be one of those times.

But to make matters worse, the new matrix includes a TRID poison pill that could impact regulatory compliance, but more importantly surprise and anger homebuyers as they go through the process of loan approval. Any borrower purchasing a home will be hit with a new fee between .25% – .375% should their debt-to-income ratio drift above 40%.

The challenge is simple to understand if you are a lender. The rate you may quote at application may suddenly change should the income or debt information be different as you go through the loan approval process. This can pose a variety of issues both immediately after loan application as well as risk should either the debt or income pre closing review change the DTI, either scenario suddenly pushing the applicant into a more expensive loan.

Imagine this scenario:

LO: Hello Borrower, sorry but your interest rate is higher now because your DTI is over 40%.
Borrower: Hmm, I don’t like the sound of that. What if I put more down and go from 95 LTV to 85 LTV?
LO: Well Borrower, if you do that your rate will actually get worse.
Borrower: If I put more down, my rate gets worse? So first you tell me my rate is X, now you tell me my rate is X+ 25% due to DTI even though I gave you all my income docs before you disclosed and now you’re saying if I put 15% more down, my rate goes to X+0.375%? I am going to call the CFPB since this clearly can’t be accurate.

The CFPB went through a multi-year, exhaustive practice where they determined that a DTI cut of 43% was no longer needed and that APOR caps would suffice to insure that high risk loans, with higher pricing, did not receive QM status. More importantly, the GSEs have been permitting DTIs up to 50. In its recent review of QM the CFPB realized that DTI is not a strong indicator of a borrower’s ability to repay. 

So why layer this DTI policy now which will confound lenders ability to compliantly originate and underwriting a mortgage and frustrate homebuyers? Is this too a way to cross subsidize the price cuts by framing in the DTI and adding a corresponding fee should the borrower exceed a level that is actually below where the QM rule has been since inception?

It’s important to note that America is on the front doorsteps of the spring home purchase season after a very difficult period in the housing sector. This new policy will throw a wrench needlessly into the process of buying a home for the tens of thousands of homebuyers across the country at the very worst time. It will result in anger and frustration for many. For the CFPB, buckle up as the consumer complaint database is going to get active should this policy change go through as planned.

The Mortgage Bankers Association sent a letter to FHFA Director Sandra Thompson on Monday stating, “A DTI-based LLPA will also create problems for post-closing quality control activities. Lenders are currently facing a rising number of repurchase requests from the GSEs, the majority of which are related to income calculations, according to data from the Enterprises. The addition of a hard DTI pricing threshold could increase the frequency of “defects” for minor calculation changes in the DTI ratio.” 

They further stated, “MBA believes the DTI ratio LLPA is unworkable and should be removed.”

I agree. This policy was borne from good intentions by the FHFA and the GSEs to help improve their mix of first time homebuyers and minority homebuyers. The fact is that this is not the way to get there. There are many other ways to do this without violating the principles of risk based pricing that have been the foundation of the GSE’s nor to create an unmanageable DTI conundrum for the industry and regulators.

Delaying implementation and engaging with stakeholders to transparently discuss options and possible solutions to meet these objectives, without setting dangerous precedent for future regimes, should be the priority.

Delay the implementation of the LLPA and DTI policy. This needs discussion and reconsideration.

David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Dave Stevens at [email protected]

To contact the editor responsible for this story:
James Kleimann at [email protected]

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