Borrowers with High Credit Scores Penalized Under New Federal Mortgage Fee Plan | Hacker News Reader

Borrowers with High Credit Scores Penalized Under New Federal Mortgage Fee Plan

reason.com

Policy that incentivizes the lower class to be more reckless with their already insurmountable debt levels seems morally dubious. A strange thing to support.

Reckless? While still paying bigger rates than their better credit score peers?

Market distortions are not made safe by being smaller than some absolute measure.

I think you misspelled “policy that reduces the debt burden of housing for those who can least afford to subsidize well-off others”?

>I think you misspelled “policy that reduces the debt burden of housing for those who can least afford to subsidize well-off others”?

No. I don't think he did.

How would you help “the lower class” in a way that you don’t find to be morally dubious?

With respect to housing specifically? I’d be ok with a bunch of different tax policy changes, various policies that encourage housing development, etc...

This change in fico value sends a message that will have a very negative impact on those who really need to be encouraged to be better savers, to be more debt averse. If you know many poor people you will understand that they often have pathological issues with their thinking and decisions around debt/credit. Policy that lessens the importance of sound financial decisions will have a negative impact on these groups. They would be much better served by policy reinforcing positive behaviors.

I have lots of poor friends and I have never heard any of them indicate that they’re making their savings decisions based off of the shifting advantages of their FICO scores.

I never really quite understood the reasoning that poor people are poor due to a lack of incentives to become not-poor. Being poor isn’t fun, it actually sucks.

If poor people are poor because of a pathology as you suggest, what incremental changes to mortgage rates would create an incentive big enough to overcome such an obstacle?

I don’t think poverty can be reduced to any one cause. People are poor for a lot of different reasons, often multiple reasons.

Some people have problems with financial reasoning, or other psychological money related issues (shopping addiction, gambling, etc). These are groups that do not benefit from mixed messaging about the importance of managing their credit.

Credit ratings are a way for lenders to assess risk which allows them to loan out more money, and money to those with fewer assets, than they would be able to lend without the signal credit ratings provide.

Diminishing the value of credit ratings is counter to the best interests of the poor and those who see upward mobility as a positive (obviously not everyone!)

This is some 19th century othering.

By your definition every group that is subject to different constraints than you has a pathology.

People who cannot afford everything they need (even once in a great while, or intermittently) sometimes have to make a choice you don’t: their credit score or keeping their housing, or their credit score or keeping a job, or their credit score or eating.

This makes them an increased risk systemically. However representationally they do not have the ability to pull themselves out of poverty because there will be poverty in the system we presently exist in. So if they pull themselves out, someone else slides in, and the systemic risk is the same, and in that context the credit rating is a largely worthless lagging indicator that says “This person at one point in recent history could not afford the commitments they made. We have no idea why, or what those commitment were, or even whether they were the result of financial practices that are now illegal.”

What is happening is the world waking up slowly to the idea that a good credit rating is in part a privilege, and not any reflection necessarily of a persons’ ability or willingness to pay for housing.

Ok, in that case why is helping the upper class by giving them reduced fees acceptable? If anything based on your comment you should be in favour of this change as it’s reducing the fee discount received by the upper class, not charging the upper class more than the lower.

If everyone in the world had a good credit score, do you think rates would go up, go down, or stay the same for a good credit score?

The data are interesting but I’m not sure they support your point:

The average score has risen for the last decade, but the scores also have a fairly strong negative correlation with generation/age. The demographics who will mostly benefit from this are Millennials and Gen Z.

https://www.experian.com/blogs/ask-experian/what-is-the-aver...

The criteria here is credit score, not income or wealth. There are low income people with good credit scores who are going to be charged more because of this change.

If the goal is "reducing the fee discount received by the upper class" it should be targeted more accurately.

> with applicants who place 15% to 20% down payment experiencing the biggest increase in fees….

This is the biggest smell to me.

Here's the thing about FHA mortgages compared to conventional; If you don't pay 15-20% down, you can -never- get rid of the Mortgage Insurance Premium (MIP, equiv to PMI on a conventional), short of refinancing to a conventional mortgage. Additionally, MIP is based on the default amortization of the mortgage, not the actual. So paying extra doesn't lower your MIP, short of getting to the point you are paid off early.

Frankly, it is just a -bit- of a slap to the face, since for most of my life I have been in a spot where I made -just enough- money to not get all the grants/etc to help with home ownership or student loans, but in keeping up with credit and life circumstances had a very hard time getting a home.

Seems like this might encourage mortgage originators to hold onto more loans to borrowers with excellent credit rather than sell them to Fannie Mae?

Right, this is good for big banks who can hold the loans on their portfolio (think JPMC) but not great for smaller originators who market to prime borrowers and have to sell to GSEs.

Might be nothing, likely to only add $40/month to a prime borrower’s mortgage. It seems like an attempt to expand FHA’s mortgage insurance to Fannie and Freddie paper (with the understanding that these mortgages are not as risky as FHA originations).

With all of that said, lack of supply and affordability isn’t going to be fixed with loosening credit requirements and shifting the cost to other borrowers. Build baby build, upzone, and fix zoning, it is the only way. We are millions of housing units short.

(family member is in the industry)

Or said another way: Fannie Mae has decided to stop over-subsidizing the lowest-risk mortgage buyers.

Fannie/Freddie exist specifically to increase access to mortgages. It doesn’t seem strange to me that they would have rules that help people with lower credit.

And given how regressive the mortgage regime is in the states im certainly not outraged by this minor oddity.

This is exactly the change you'd expect if "credit scores" aren't as powerful of an indicator as they were thought to be. Given that "credit scores" are mostly based around how someone handles small amounts of short term debt, whereas mortgages are huge amounts of long term debt, this wouldn't be terribly surprising. It's disappointing to see Reason framing this in tired reactionary nonsense, when there's a straightforward explanation.

So every bank in the world is irrational? Sounds like you could make a killing by starting a bank and making low interest home loans to people with bad credit scores.

First, an argument based on the efficient market fallacy isn't particularly interesting.

But even so, I don't understand what "rationality" has to do with anything here. In the presence of an overwhelming centralized market maker, the market is going to follow its lead. If this weren't the case, then the headline would be even more fallacious - originating banks would just be selling those loans to someone else besides the government.

I would much rather be correct than to make this interesting for you.

You fail to explain how exactly this market maker influences banks to charge higher rates to people with poor credit scores. You also don't address the fact that this is universally how loans work in the modern world, even outside the realm of home loans.

> I would much rather be correct than to make this interesting for you.

Apparently you missed my point - it isn't an either/or. Making an argument with the efficient market fallacy is uninteresting in part because it's most likely wrong. cf the joke about the economist that doesn't pick up a $20 bill laying on the ground, because if it were real money then it would have already been picked up by someone else.

> You fail to explain how exactly this market maker influences banks to charge higher rates to people with poor credit scores

It's right there in the assumption of the headline. If banks didn't pass on the rates from the governmental market maker(s), then borrowers wouldn't see any changes from this.

> You also don't address the fact that this is universally how loans work in the modern world

You seem to have been taken in by the highly misleading article, directly demonstrating my original point. It seems that this change is making fees for high credit scores less low, and fees for low credit scores less high. The curve is still a sensible monotonic function, just a slightly different one than before.

Do you believe the previous rates were simultaneously too low for good credit and too high for bad credit with respect to the risk of defaulting? Do you believe the new rates are nothing more than trying to better model the risk? If not then please be precise. Being monotonic means little. Why is it “sensible”?

I mean, that's exactly what my original comment said. Those adjustments are right in line with what you'd expect from a simple reduction of credit scores as a predictor. And given how often faith tends to be overextended to centralizing financial models, I'd say doing so is more likely in the right direction than not.

I haven't read any other discussion of the change other than this horrible article, and I'm not going to seek it out because the answer to culture war bullshit isn't to fill your head with both types of poor takes and try to somehow average them.

> Those adjustments are right in line with what you'd expect from a simple reduction of credit scores as a predictor.

It doesn't follow that pattern at all. Take a look at the heat map here: https://www.mortgagenewsdaily.com/news/01192023-big-llpa-cha...

Previously the rates were based on risk. The new rates are engineered to make it cheaper to get into homes with less money down (of all credit scores) or poor credit. It's subsidized by charging higher rates to people with good credit scores who put more money down.

Oh, and straight from the horses mouth: https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announce...

> “The Equitable Housing Finance Plans represent a commitment to sustainable approaches that will meaningfully address the racial and ethnic disparities in homeownership and wealth that have persisted for generations," said FHFA Acting Director Sandra L. Thompson. “We look forward to working with the Enterprises, lenders, and other housing industry participants to further develop the ideas described in these plans."

I've looked at the "heat map" and I don't see anything that's inconsistent with a reasoned adjustment still based on risk, deemphasizing credit scores.

There's an explanation that the 760+ and 780+ bands are new, so a drastic increase in the previously highest band makes a lot of sense.

Also if I'm reading that article right, this is actually one time fee. So Reason is completely handwaving it into a monthly fee to conjure large numbers, making the Reason article even worse than it first seemed.

Statements by political bureaucrats being in the language of their party aren't indicative of much. It's the same culture war gobbledygook as the Reason article, just a different flavor.

It is deemphasizing down payment more than credit score, but only for people with good credit.

They are literally telling they world why they made these changes and you are criticizing Reason for taking them at face value.

It's an increase in a 1 time fee rolled into the loan which equates to an increase in the month to month mortgage which is constant. It's perfectly honest to state it how they did.

I guess if you're really upset by the penalty, you can deliberately tank your credit score before applying. What, no takers?

I just bought a house. I've spent a very long time being responsible and doing the right thing, financially. For me to now go out and deliberatly make a bunch of bad decisions goes against who I am. This policy is out to attack people like me, people who work diligently at handling our finances.

I feel bad for poor people. I grew up poor, and I want to help the unfortunate, but this policy doesn't do that - it just rewards people who are unresponsible with money (some of them are actually poor, but some are not).

This doesn't help the "poor"-- it helps those with bad credit scores. There are some people in both camps, but there are many who are poor who pay their debts on time.

I wasn't aware that the fees are a function of credit score. What's the rationale for this?

To benefit rich donors. That’s really all there is to it.

It’s actually a really great example of how people’s bias regarding fairness and equality works:

Here we have a bunch of fees that are discounted if you have a higher credit score. The discount is being reduced. A bunch of people (and this article) are losing their shit over this reduction in discount being unfair because it only impacts people with higher credit scores, despite the entire discount not existing at all for people with lower credit scores. And this is before we factor in the much more substantial impact of worse interest rates, etc (the article talks about how this could cost $480 a year, while ignoring the $2000/year a half percent increase in interest rate costs

Your framing is incredibly odd to me and probably most people. There is no discount. There is only extra cost to cover risk if you have a history of being irresponsible.

the fact that you're equating a bad credit score to irresponsibility is the fundamental fallacy underlying most of the arguments in the comments here.

This is the textbook definition of irresponsibility.

He didn't even ask if they identify as someone who pays their bills on time. Solvency is a social construct.

I suspect you do not really understand The nuances of "identifying" but yeah, there is a definite and large social construct to solvency, mediated by how society is willing to treat you financially. poor taxes are a good example of this.

The whole point here is we're talking about fees unrelated to the general interest cost of being "high risk".

This does of course require a baseline assumption of "good credit" == "low risk". When I got my first mortgage in the US I had tremendous difficulty, because "credit score" is not related to risk, but to regularity of credit payments. I had "bad" credit because I did not use credit cards. Because I did not have a car loan. Because I did not have random debt. I very nearly got denied because despite being able to easily make mortgage payments, being stably employed for the entire period of my US residence, my bank had a hard rule of requiring at least 3 different "recurring debts" - but I paid my fixed bills annually so it is cheaper. "yay".

Building your "credit score" requires objectively bad choices: you must use credit services even if you don't need to, you must not pay off all your debt, you must apply for more credit than you need, etc all of which costs money. At the same time sensible actions like shopping for good credit options results in credit checks that lower your credit rating.

All this before we get to the rating agencies knowingly reporting false information and charging you to stop them, which in any other industry is called extortion.

So your argument is that credit scores do not correlate with risk? How do you think these models get made? Do you understand how trivial it is for an institution to analyze the past 10 years of loans and see whether the rates they are charging leads to profits or losses.

I think there are many negative factors in credit scores that are predictive, and some that are more iffy.

Getting dinged for making late payments or missing payments makes a lot of sense. Getting dinged for not having a car loan or a mortgage is I dunno?

Solid loan underwriting also takes into account source of income and some amount of history of income, but it's not part of the credit score at all, which is kind of funny. If your credit limits are out of step with your income, you might get dinged for high balances that you regularly pay off and have capacity to do so, but your limits are just low compared to your income; but you might be getting lots of points for having spare credit, even if it's at a level that would take you a decade to pay back because your income declined and you lenders never found out and didn't reduce your limits.

Some lending is done strictly by credit scores, which seems foolish, but usually it's for smaller amounts, so I guess it works out.

It seems strange to me that a number designed to measure risk has nothing to do with it. If this were really true, a smart bank would come along with their own score and undercut it.

They have many years and many millions of data points that connect credit scores with repayment of loans. Banks that do a better job of measuring it get wealthier. It's a very simple system.

It's a signal that correlates with risk of default on the loan.

As someone with great credit, I'm fine with this.

What about people with good credit but low income? I get that perhaps it's easy to conflate the two, but they aren't always related.

Personally, I have no strong opinion either way on the issue.

That's a fair question, but overall, see my answer to the other person here who responded to me. My position is certainly not perfect, but it's also an assertion of ideological/practical preferences, and definitely doesn't cover the whole picture, just the high level intent of "giving all the advantages to only those who require them them least is a stupid idea" for broad systemic health.

There's a lot of variables to unpack and configure in any system, and this is no different.

As someone with great credit, I'm not. I worked my ass off for this.

"I worked my ass off for this."

So did I. But having come up from very poor/working class, I also know that path was painful and I have enough means to live modestly and view that as a way to not be "screw you, I got mine" to the rest of society. And that's not just an empathy overdose. That's knowing even cynically, that if the overall larger number of people in the society around me who get even marginally improved outcomes makes same said society I choose to reside in likely to be more stable, resilient and less interrupt-driven.

That's a system investment instead of just being self-focused to the point of ignoring everything else (the latter eventually leads to 'everything else' imposing its collective will reactively otherwise)

> People who make more money "penalized" with higher tax rates

How is this any different?

You seem to be comparing apples and oranges.

Credit scores are a reflection of your likelihood of defaulting on a loan, and in debt financing, a fundamental truth is that higher risk = higher reward (in this case, higher fees).

That said, I don't have a dog in this fight.

Talk about headlines that mislead. This is not “we’re making the fees higher for people with higher credit ratings” (a boomer driven invention from the 80s).

This is reducing the overall fee discount people with higher credit ratings, from the article: “ lower-credit buyers will still pay more in LLPA fees than high-credit buyers”

So if you really think this is unfair, go and damage your credit rating. That way this particular penalty won’t impact you, because you won’t be getting the reduced discount anyway, and all your other fees will be higher, and your interest rate will be higher. Sounds like a win to me!

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