This summer Fannie Mae and Freddie Mac, on marching orders from their regulator Federal Housing Finance Agency, are going to charge certain borrowers a 0.375% fee on their loan amount if their total house payment and other debts exceed 40% of their monthly gross income.
For example, let’s say your new house payment will be $5,000 including property taxes, homeowners’ insurance and HOA fees. You also have a car payment of $400 for a total of $5,400 per month.
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Assume your monthly household gross income is $12,500. Your backend ratio or — what’s called the debt-to-income ratio — would be 43.2%. (The math takes the total of house and car payments and divides that by the monthly gross income, in this example).
Let’s say the 30-year fixed rate you’ve applied for is 6% with 1 point cost on a $625,000 loan amount. Your one-time origination point equates to $6,250. Fast forward to this summer. Because your debt-to-income ratio or DTI is over 40% (43.2%), you will be assessed another 0.375%-point cost or $2,343.75.
Fannie and Freddie max their loan approvals out at a DTI of 49.9% for well-qualified borrowers with larger down payments. That max DTI doesn’t change under the new rule.
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Originally slated to start May 1, FHFA announced an implementation delay in mid-March 15, moving the fee debut to Aug. 1 on mortgages purchased by the mortgage giants.
Keep in mind, buyers, that you don’t have that much time.
Mortgage lenders will start tacking on this new fee in loan estimates for applicants starting 30 to 45 days before delivering to Fan and Fred on Aug. 1. Assume a June 15 start date for the new pricing hit or ask your mortgage loan originator.
The fee is the brainchild of FHFA director Sandra Thompson.
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“These changes to upfront fees will strengthen the safety and soundness of the Enterprises by enhancing their ability to improve their capital position over time,” Thompson said in the Jan. 19 release.
It’s been a bad week for Thompson who recently had to release a “let’s set the record straight” statement about the change in an unusual move for a government official in my dozen years of writing this column.
She wrote: “Unfortunately, much of what has been reported advances fundamental misunderstanding about the fees charged by Enterprises, and why they were updated.”
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Thompson was referring to another bright idea of hers — reducing fees for lower down payment borrowers with lower credit scores and simultaneously raising fees on similarly situated borrowers with higher credit scores.
Thompson’s next headache is going to be either continuing to defend this unworkable DTI pricing mandate or walking it back permanently.
Robert Broeksmit, president and CEO of the Mortgage Bankers Association, has been diplomatically asking Thompson to stop going down this slippery DTI slope. He penned a blog post in April that beseeched the agency to come up with a better plan on loan-level pricing fees.
“To start, tying an LLPA to a DTI ratio would pose a multitude of operational issues, and compliance challenges, and also create a frustrating and confusing borrower experience,” he wrote.
He imagined this scenario in the post: “Imagine being a borrower who is quoted one rate when applying for a loan, then getting near closing and hearing from your lender that, due to a slightly slower month at work or a higher homeowner’s insurance premium, the cost of your loan will have to go up because you exceeded FHFA’s DTI threshold.
“In addition, you learn that your lender must postpone your closing for a couple of days because the price change triggered a redisclosure and mandatory three-day waiting period under the CFPB’s Know Before You Owe rule.”
My advice: If or until director Thompson postpones again or kills this higher DTI pricing kerfuffle, get your mortgage before summer or be prepared to pay more.
Freddie Mac rate news
The 30-year fixed rate averaged 6.43%, 4 basis points higher than last week. The 15-year fixed rate averaged 5.71%, 5 basis points lower than last week.
The Mortgage Bankers Association reported a 3.7% mortgage application increase from last week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $614 less than this week’s payment of $4,557.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point: A 30-year FHA at 5.625%, a 15-year conventional at 5.375%, a 30-year conventional at 5.99%, a 15-year conventional high balance at 6.125% ($726,201 to $1,089,300), a 30-year high balance conventional at 6.5% and a jumbo 30-year fixed at 6.25%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year Veteran’s Affairs fixed rate at 5.125% with 2 points cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com.
