The Federal Housing Finance Agency (FHFA) has abandoned its intention to change a mortgage cost for borrowers with specific debt-to-income ratios, much to the relief of many.
A limited group of debtors with debt-to-income (DTI) ratios higher than 40% would have been subject to the fee. DTI is the percentage of your monthly pre-tax income that is used to pay recurrent debts, such as credit card payments, rent, and mortgages. On May 1, this new fee and additional adjustments based on credit score and loan amount were scheduled to take effect.
Congressman Warren Davidson of Ohio and head of the Subcommittee on Housing and Insurance remarked, “It was obvious from the beginning that this upfront fee would harm future mortgage borrowers.”
How would borrowers have been harmed by the DTI ratio fee?
DTI ratios exceeding 40% would have required borrowers to pay an extra 0.375% fee on their mortgage that Fannie Mae and Freddie Mac would then buy.
That would have amounted to a $1,125 up-front cost on a loan for $300,000. Or it would cost an additional $24.75 per month if the borrower selected a higher interest rate since they were unable to make that payment. That would result in an additional $8,910 over 30 years.
According to Robert Broeksmit, president and CEO of the Mortgage Bankers Association, an industry group, a borrower’s DTI ratio isn’t a reliable predictor of their capacity to repay loans on its own.
“There’s also the unfairness issue,” added Andrew Ryan, sales operation manager at California’s Cornerstone Home Lending. “A couple could have almost perfect credit, no credit card debt, pay their bills on time, but through no fault of their own have a DTI ratio of 41%,” he said, adding that they would still be required to pay the fee. According to him, “fee makes their DTI ratio even higher.”
According to Ryan, other organisations, including the Veterans Affairs, U.S. Department of Agriculture, and Federal Housing Administration loans, permit a 50% DTI ratio without adjusting the mortgage fee. The FHFA is therefore out of sync with respect to Freddie and Fannie loans.
What harm would the DTI ratio surcharge have caused to lenders?
Income and expenses may change several times during the loan process, “especially considering evolving assumptions concerning the nature of debt and income, and the growth in self-employment, part-time employment, and “gig economy” employment,” wrote Robert Broeksmit, president and chief executive of industry group Mortgage Bankers Association, in a letter to Sandra Thompson, director of the FHFA, in February.
DTI ratios may fluctuate as a result of these developments, which could result in several adjustments to a borrower’s loan pricing. And that can result in difficulties adhering to guidelines for loan changes or a delay in the closing procedure.
Multiple price changes, according to Broeksmit, “could endanger borrower confidence and give the impression of a ‘bait and switch’ when offering loan pricing.”
Even though concerns about the DTI ratio fee have subsided, some are still worried about fee adjustments based on credit scores and down payment amounts that took effect on May 1.
Some customers with strong credit scores paid more as a result of those charge increases than they would have before May 1 — but less than if they had a poor credit score. From before May 1, the punishment for having a lower credit score decreased.
Congressman from North Carolina and head of the House Financial Services Committee Patrick McHenry remarked, “Congress will now take action to end this tax on creditworthy borrowers.”
The FHFA claims it is now moving on to more discussions with industry stakeholders about setting fees and gathering public opinion, despite some members of Congress want to abolish those fees. It promised to soon provide information on an impending call for feedback on a fee pricing scheme.