A relatively minor bureaucratic change proposed by the Federal Housing Finance Agency recently caused a viral storm in the right-wing media, with outlets such as the washington times, New York Post, National Review and foxnews all reporting some variant of the sentiment expressed in the Times headline: “Biden to Increase Payments for Good Credit Homebuyers to Subsidize Subprime Mortgages.”

The underlying issue concerns the recent decision by FHFA, as the government-sponsored enterprise (GSE) conservative, to review the loan-level pricing adjustments (LLPAs) charged by Fannie Mae and Freddie Mac, which together account for approximately 60% of US residential investment mortgage loans. The LLPAs charged by GSEs are primarily determined by the type of loan, the loan-to-value ratio, and the credit rating of the borrower.

What is generally true in coverage is that the changes, which were first announced in january, affect loans given to GSEs from May 1 and therefore have been implemented by lenders for months already; In general, they tend to lower costs for those with lower credit scores and increase costs for those with higher credit scores. In fact, as part of a broader price review change announced last year, FHFA completely eliminated conventional loan fees for approximately 20% of homebuyers, financed by initial fee increase for second homes, high-balance loans, and cash-out refinances.

Unfortunately, the way this story has been twisted in the wake of the changes would leave many news consumers with the impression that borrowers with higher credit scores will pay more directly in fees than borrowers with lower credit scores. This is certainly not the case. Comparing apples to apples, at all levels of the grid, a borrower with a higher credit score would continue to have lower LLPAs (or, in many LTV categories, none at all).

writing on your substack newsletter Kevin Erdmann of the Mercatus Center responded to a Fox News graphic that stated, under the new rules, that a “FICO score of 620 gets a 1.75% fee discount,” while a “FICO score of 740 pays a from 1 %”:

I’m pretty sure what they’ve done here is pick the low credit score that had the biggest rate reduction. Then they reported the full fee for a higher credit score. So a low down payment 620 score has a fee that went from about 6.75% to 5% (when mortgage insurance is included). And furthermore, the fee for a score of 740 went from 0.25% to 1%. (plus a 0.25% mortgage insurance fee). Why didn’t they just say 740 score fees went up 0.75%? He would still get his partisan point across. It would still be weird, because you would be describing mortgages with two different down payments. And it would hide the fact that the 620 score still has a fee that is more than 3% higher than the 740 score. But at least it wouldn’t be mixing levels with changes.

Ultimately, whether these particular changes are good or bad for GSEs is an actuarial question. As Erdmann goes on to point out, there is good reason to believe that the rates for borrowers with lower credit have been too high for an extended period of time.

But there are other reasons to worry about what the incident could mean for insurance markets. The concern here is that state regulators (or, worst case scenario, Congress) might think that charging high credit scorers more to subsidize those with low credit scores might be an idea worth emulating.

Obviously, the use of credit information by insurers in underwriting and rate setting has been a topic of public debate for four decades. At this point, while a handful of states outlaw the practice entirely, most have adopted legislation that allows it, with some caveats.

The FHFA precedent, allowed because Fannie and Freddie have been wards of the agency for nearly 15 years, is particularly troubling given recent cases of state insurance regulators moving to limit or prohibit the use of credit information without any explicit instruction of state legislators. so. The decision of the courts to uphold such unilateral decisions depends on the particularities of state law.

Last year, Washington State Insurance Commissioner Mike Kreidler moved to adopt a permanent rule that enacted a three-year ban on the use of credit-based insurance scores, after a rule of previous emergency to do the same was declared invalid in September 2021 by the Thurston County Superior. Court Judge Indu Thomas. A Final Order August 2022 de Thomas found that Kreidler exceeded his authority by adopting the rule when there was a specific state statute that allowed insurers to use credit scoring.

More recently, the Nevada Supreme Court ruled in february to uphold a temporary ban on the use of credit information in insurance rate setting originally issued by the Nevada Division of Insurance in December 2020. The rule, which is scheduled to expire on May 20, 2024, was challenged without success by the National Association of Mutual Insurance Companies.

The rise of credit-based insurance scoring has revolutionized the industry, allowing for much greater segmentation and better risk-rate matching. Where state auto residual insurance entities once insured up to half or more of all private passenger auto risks, they now account for less than 1% of the market nationally. It would be unfortunate if some misleading headlines inspired ill-considered regulation to reverse that progress.

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