Mortgage Fees Changed. Then Things Got Messy.

If you're under the impression that the federal government is playing Robin Hood with mortgages — forcing home buyers with good credit to pay more than people with bad credit — you have been bamboozled.

The numbers tell the truth: Home buyers with high credit scores pay less on their mortgages than buyers with low credit scores. Bigger down payments result in lower costs, too.

It's understandable if you thought otherwise because mortgage fees were updated recently, and the commentary around the change sometimes threw more shade than light.

An overhaul of mortgage fees

The misinformation spread after a regulator, the Federal Housing Finance Agency, recalibrated mortgage-related fees. The changes went into effect May 1. Fees went down for home buyers with low credit scores and went up for some (but not all) buyers with middling to high credit scores.

The FHFA didn't explain the reasons for the changes in detail. Critics reacted like your ninth grade teacher did when you turned in a math test without showing your work: They demanded supporting documentation. But the FHFA hasn't provided it yet. Lacking details about the FHFA's process, commentators and politicians filled in the blanks, often inaccurately.

The gist of their complaints was that people with excellent credit are being overcharged so people with bad credit can be undercharged.

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Tucker Carlson slammed the fee policy April 21 in his final episode on Fox News, saying, "The people with high credit scores will pay higher fees on their mortgage payments to subsidize people who haven't maintained good credit."

Sens. Roger Marshall, R-Kan., and Thom Tillis, R-N.C., said in a news release April 26 that the revised fees would "penalize Americans who have managed their money responsibly in order to subsidize high-risk borrowers with low credit."

Stacy Garrity, the treasurer of Pennsylvania, wrote in a letter to the FHFA's director May 1 that "those who make down payments of 20 percent or more on their homes will pay the highest fees — one of the most backward incentives imaginable."

But when you dig into the numbers, these accusations aren't supported by evidence. Garrity's letter, signed by 34 fiscal officers from 27 states, relied on an error-filled chart in an article about the fee changes.

Higher credit score = lower fee

First, an explanation of the fees. The FHFA oversees Fannie Mae and Freddie Mac, which set the lending requirements for conventional mortgage loans. Fannie and Freddie charge upfront fees that vary depending on the borrower's credit score and loan-to-value ratio or percentage of down payment. Fannie calls them loan-level price adjustments, and Freddie calls them credit fees.

The upfront fees protect Fannie and Freddie from financial losses when borrowers fall behind on their house payments. Fees are higher for borrowers considered riskier: those with lower credit scores or smaller down payments, or both.

Here's an example of the effect of credit scores on upfront fees: Let's say three people are buying houses. Each makes a 20% down payment, and each is borrowing $300,000. The only difference among the buyers is credit score. One buyer has a 796 credit score (among the top 10%, according to the Urban Institute, a nonprofit focused on public policy), another has a 734 score (in the middle, with half of borrowers scoring lower), and one has a 644 score (among the bottom 10%):

The buyer with a 796 credit score will be assessed $1,125 in upfront fee.
The buyer with a 734 score will pay $3,750.
The buyer with the 644 score will pay $6,750.

So much for the claim that people with high credit scores pay higher fees. Upfront fees go up as credit scores go down.

Borrowers are unlikely to find these fees as a line item in loan paperwork. Instead, lenders will pass along the cost in the form of a higher interest rate. They may fine-tune it with adjustments to origination fees. Returning to the three hypothetical home buyers above, the lender might raise the interest rate by 0.125 percentage points on the buyer with the 796 score, by a quarter of a percentage point on the buyer with a 734 score and by half a percentage point on the buyer with a 644 score, along with fee adjustments.

When you take private mortgage insurance into account, buyers who make bigger down payments pay less than buyers who make smaller down payments. Take two borrowers with 734 credit scores, each borrowing $300,000 and putting down less than 20%, which triggers PMI. In the first five years:

A buyer with a 15% down payment pays a total of $7,200 in upfront fee plus 60 monthly PMI premiums.
A buyer with a 9% down payment pays a total of $12,525 in upfront fee and PMI premiums.

Meanwhile, a buyer with a 20% down payment pays a $3,750 upfront fee and no mortgage insurance. Note that the upfront fee is lower for a 9% down payment than for a 15% down payment, but the mortgage insurance premiums are much higher. Any fee comparison that ignores PMI costs is incomplete.

For many, fees are higher than they were before

Another complaint from critics has a factual basis: Many home buyers will pay higher fees than they would have paid before May 1, under the previous fee schedule. The hardest-hit home buyers have credit scores from 680 to 779 and make down payments between 5% and 25%. (The median down payment in the third quarter of 2022 was 9%, according to Attom Data Solutions, a property data provider.)

Take a buyer with the median credit score of 734 and a mortgage for $300,000:

With 9% down, the upfront fee is $1,125 higher than before May 1.
With 15% down, the fee is $2,250 higher.
With 20% down, it's $1,500 higher.

FHFA Director Sandra L. Thompson defended the changes, writing in a statement April 25 that the revised fees "more accurately align pricing with the expected financial performance and risks of the underlying loans." In other words, the FHFA adjusted the upfront fees because they had not kept up with shifts in borrowers' expected outcomes. The fees had not been overhauled in eight years.

The FHFA's main job is to ensure that Fannie and Freddie won't need another government bailout like the $187.5 billion taxpayer-funded rescue they got after the 2008 financial crisis. The fees on borrowers are intended to strengthen the mortgage giants so taxpayers won't have to recapitalize them again in an economic downturn.

But the FHFA didn't back up the fee changes with data. It assumed, naively, that everyone would take the agency's word for it.

Fees fell for buyers with low credit scores

While upfront fees went up for many home buyers with credit scores of 680 and higher, they went down for buyers with credit scores below 680. That's a grievance behind the letter from Marshall and Tillis, who complained that the revised fees are "an effort to decrease mortgage rates for riskier individuals with low credit scores and forcibly raise rates for those with higher scores."

The concern goes beyond Congress. Pierre Debbas, managing partner of Romer Debbas LLP, a real estate-focused law firm in New York City, thinks of a hypothetical home buyer with a high credit score and a 20% down payment. Debbas says the fee changes give that buyer a message: "We're going to increase your interest rate so we pass off the expense to you, so we can provide lower interest rates to those who don't have as much skin in the game — i.e., equity in their properties and/or higher-risk loans."

But in practice, buyers with low credit scores and small down payments won’t get a big boost from decreased fees. The reason: The FHA beats PMI.

Low-score borrowers will use FHA

These upfront fees apply only to conventional loans, which require buyers to buy PMI when they make down payments of less than 20%. But the government offers mortgage insurance, too — through the Federal Housing Administration. And FHA-insured loans cost less than privately insured loans for borrowers with lower credit scores.

Specifically, over the first five years, loans with FHA mortgage insurance cost less than loans with private mortgage insurance:

For buyers with credit scores under 740 who make down payments under 5%.
For buyers with credit scores under 720 who make down payments under 10%.
For buyers with credit scores under 700 who make down payments under 15%.
For buyers with credit scores under 660 who make down payments under 20%.

Bottom line: Attentive mortgage lenders will recommend FHA loans to many buyers with lower credit scores. And if buyers with low credit scores aren't getting conventional loans, then high-score buyers aren't subsidizing them.

The offices of Marshall and Tillis didn't respond to requests for comment. The press secretary for Pennsylvania's treasurer responded with talking points that cited an article in The Hill that, in turn, took information from an erroneous chart in a Forbes Advisor article.

The truth about upfront fees

Home buyers with high credit scores continue to face lower upfront mortgage fees than buyers with lower credit scores.
After taking mortgage insurance into account, buyers with bigger down payments pay less than buyers with smaller down payments.
Fees went up for many buyers to account for changes in risk over the years, according to the FHFA.
Upfront fees on conventional mortgages went down for buyers who would nevertheless be better served by FHA loans.