The agency that regulates how mortgage loans get approved in America recently proposed a loan approval rule that risks adding fees for borrowers who make less money. Sounds crazy, right?
The rule proposal got delayed, and now there’s a chance to get this rule right before it becomes official.
The rule was proposed by the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, the two government-sponsored orgs that back most mortgages in America.
Fannie and Freddie buy loans from mortgage lenders, giving lenders liquidity to make more loans. This helps keep the whole system running smoothly, and is a key reason America has a 30-year fixed mortgage whereas other countries only have short-term adjustable rate mortgages.
FHFA recently proposed a lender price premium on loans above a certain debt-to-income ratio (DTI).
DTI is how lenders approve loans. It’s your total proposed monthly housing and non-housing debt divided by your total monthly income.
The resulting figure is a percentage, and the proposed FHFA rule would say an extra fee would get added to loan approvals with DTIs of 40% or more.
In lending, its normal for a loan to cost more if its riskier, but DTI is the wrong target for loan-level price adjustments.
If the proposed adjustment is 0.375% on a $300,000 loan, that’s $1125 in extra fees.
So if the borrower tips over 40% DTI because they make a little less than the next borrower, or because rates rose, or because they had to bid more on a certain home in a bidding war, this is a substantial extra fee that’s different from when they started.
Mortgage Bankers Association chief Bob Broeksmit has been pushing for FHFA to review and amend this proposed rule, and his latest case is linked below.
This is important reading, and the MBA is on the right side of this issue.
The MBA is right that adding fees to mortgage loans based on a debt-to-income ratio of 40% or greater is the wrong approach by FHFA. Here's a rundown.
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