Mine government decided that based on studies like this
https://www.federalreserve.gov/econres/notes/feds-notes/are-income-and-credit-scores-highly-correlated-20180813.html
And others
That people with high FICO scores have an unfair advantage in government backed loans. Someone with a 780 FICO has easier access to loans. They also determined that having perfect credit correlates with higher income.
This is the chicken or the egg?
Having a high paying W-2 job could make it easy to pay your bills on time
or
Having perfect credit gets you the high paying job when employer does a background check?
So
In order to level the playing field they added or changed Loan Level Pricing Adjustments (LLPA). LLPA are all the ins and outs that a lender reviews to tell a borrower what rate they get: a cash out refinance, higher loan to value, condo, non owner occupied for example has higher bits of pricing adds than a purchase with lower loan to value on a single family owner occupied. Each of the pieces of information determine the risks of default based on historic calculations of past loans gone bad.
This new concept will cost the perfect credit customer .125%- .25% more in fees (fees go into the mortgage rate) than the middle to lower credit customer.
A borrower might never know the difference. It's a way to bump up the lower end deals to be able to qualify and close.
The difference is tiny but in the overall ocean it will allow more lower FICO borrowers to be able to close.
Here is Fannie Mae's chart of pricing adjustments as they will change.
I know this is lots of numbers and only I love numbers but it gives you the nitty gritty of how this "deal" is supposed to help the lower end deals.
https://reason.com/wp-content/uploads/2023/04/LLPA-Matrix-updated-03-22-23.pdf
Feel free to ask me questions or call me to explain.
It isn't "fair" but there is an argument that credit reporting isn't fair. I agree that FICO or Vantage can be manipulated. Scores can be improved if a person has enough knowledge, access, and help.
The tide of our current administration is to find ways to use Federal money for the lower end. Lower end I mean - lower score, lower income, smaller deals. We are all paid commission on the transaction amount. The Fed can't legally give bonuses to lenders for doing more deals for low to moderate income or Americans who often have little access to buying a home.
Every loan we do is tracked by: FICO, income, location, borrower ethnic/race etc and the numbers show that those with higher FICO in higher cost areas get more Fannie and Freddie loans.
This LLPA is not yet added to USDA and VA but I expect that's the next wave after the administration waits to see if Congresspeople or Senators start yelling and screaming.
I firmly believe the system is rigged towards lenders closing the cream of the crop. A w-2 high wage earner with high FICO who knows how to use technology gets a better deal and is easier to deal with so lenders have a bias not to do the "hard ones" that require more time and work. This is human nature and the system we have which is capitalism.
This experiment was tried in the past. It would not be the way I would organize or provide incentive for all of us to do more small hard deals.
I proudly serve on several MBA committees namely the MBA Legal. Working on a proposal now.
This does not change Jumbo loans.
Multifamily loans also got a perk like this (units more than 5).
