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In January, the Federal Housing Finance Agency (FHFA) made a series of significant changes to loan level pricing adjustment (LLPA) fees charged by Fannie Mae and Freddie Mac on conventional/conforming mortgages. Although they went largely under the radar at the time, they ultimately caused an uproar among consumers, the mortgage industry and even some lawmakers.
Eventually, FHFA Director Sandra Thompson issued a statement addressing what the agency saw as misinformation.
On Friday, Michael Shemi, the principal advisor for FHFA’s Division of Housing and Mission Goals, sat down for an exclusive interview with HW Media Editor in Chief Sarah Wheeler on the HousingWire Daily podcast to talk about the changes.
FHFA reaction to the response
“The pricing changes FHFA has made since 2020 are intended to improve their ability to reach capital adequacy to meet the update of capital requirements and prevent potential future taxpayer-funded rescue,” Shemi said in the interview. “And the changes to pricing provide a solid footing for Fannie and Freddie to continue to support homeownership nationally in a safe and sound manner in a way that’s consistent with their charters.”
Regarding the vocal response to the LLPA rule changes, Shemi said that criticism around the assumed objectives of FHFA are “wrong,” but also that much of the criticism is anchored to outdated grids that required review.
“We’ve taken a big step forward to improve the risk-based pricing framework,” Shemi said. “It was the old framework that was actually out of sync. [These changes] give us the ability to get rid of quirks that prevailed for many years. Does that seem right that the last time these were comprehensively reviewed was eight or nine years ago? Once a decade didn’t make a lot of sense to us, [nor to] to Director Thompson. We thought it was a good time to conduct this review now.”
When asked about the visceral response to the pricing changes, specifically related to the changes in pricing for different credit scores, Shemi said much of the reaction came from consumers and not from the industry itself.
“With respect to the consumers and as it relates to the May 1 date, as you pointed out, we announced these latest changes back in January,” Shemi said. “The industry started rolling these out to consumers in the interim, [which is] just the way the mechanics of the mortgage market works. There’s no magic for the May 1 effective date. These are effective for mortgages delivered May 1 to the GSEs.”
That means that the mortgages impacted by the new fees had already started to be priced around the end of February or beginning of March in anticipation of the May 1 effective date, he said.
“The industry had already consumed these fees for weeks,” Shemi explained. “So, I think there seems to have been an attempt to just try to stoke fears in the hearts and minds of consumers around the May 1 date. But for the consumer, there wasn’t anything particular that they had to be concerned with. So, calls around the May 1 date either revealed something disingenuous or just a fundamental misunderstanding around the mechanics of how the mortgage market works.”
The DTI component, political headwinds
Industry response to the consideration of DTI as part of the pricing index and larger LLPA changes was met with strong opposition by the mortgage industry, resulting in those changes being later delayed by FHFA. Shemi said that FHFA remains sympathetic to the expressed industry concerns, but also argued that the updated pricing framework integrates income thresholds more actively in fees.
“There are instances where we use income to actually reduce fees,” Shemi said. “So, for first-time homebuyers at 100% area median income and below, or 120%, area median income and below in high-cost areas, under those thresholds we use income information to reduce or fully eliminate fees. So, we just want to make sure that the consumer has the right experience and that the industry is able to get these to the consumer in the right way.”
On an earlier episode of HousingWire Daily, former MBA CEO Dave Stevens said he was concerned that the changes signaled a new paradigm where an FHFA director could “tinker” with risk-based pricing since a sitting president can now dismiss the FHFA director at will. Wheeler asked Shemi whether that meant these fees could be changed at the whim of whichever party was in power.
Shemi said that the fees had not been properly evaluated in a decade, and did not make predictions about how political headwinds could change FHFA policy in the future.
“What’s important to understand here is that this calibration has been done to more closely align with the enterprise regulatory capital framework that became effective last year,” Shemi said. “It wasn’t there to incentivize or penalize different parts of the grid, but calibration to the enterprise regulatory capital framework provides a lot of explanation in terms of certain fees going in certain directions.”
The full discussion can be heard here.
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