President Joe Biden’s new mortgage plan has raised questions about whether price adjustments, which will increase mortgage fees for borrowers with strong credit while lowering fees for high-risk borrowers, could have a impact on the value of the properties over time.
The new Federal Housing Finance Agency (FHFA) rule, which takes effect May 1, is part of the administration’s effort to make homeownership more accessible to first-generation and low-income buyers, who tend to be people of color, but it has sparked a debate about whether this could lead to increased mortgage defaults and lead to lower home values.
“Many high-risk borrowers recruited under the plan will buy homes in low-income neighborhoods,” The Wall Street Journalwrote the editorial board in a Saturday editorial. “The working-class families who already live in these neighborhoods have worked hard and saved for their homes. If their new neighbors default and face repossession, nearby homeowners could see their property values plummet. .”
Joe Nunziata, co-CEO of Orlando-headquartered FBC Mortgage lender, said Newsweek that because low credit scores can appear in both low-income and high-income neighborhoods, the risk of default does not just affect low-income neighborhoods. Instead, the impact may be felt in “every neighborhood”.
While it’s possible that hypothetical defects could negatively affect a neighborhood, “it would take more than a few such defects,” said Stephen Malpezzi, a real estate professor at the University of Wisconsin-Madison. Newsweek.
“There is a nonlinear relationship between the number of initial defect concentrations and spillover to neighbors,” Malpezzi said.
A 2008 study published in the Journal of Housing Economics analyzed the national mortgage crisis of the time by examining property sales and foreclosures in New York City to determine the extent to which foreclosures drive down the value of neighboring properties. Although researchers, in general, have found that “properties near foreclosures are selling at a discount”, the decline in property values is not a direct result of nearby foreclosures.
On Tuesday, FHFA Director Sandra Thompson reassured the public about the new rule, saying in a press release that moves to update the pricing framework for Fannie Mae and Freddie Mac (mortgage institutions backed by the federal government, known collectively as the Enterprises) “will enhance security and soundness, better ensure that the Enterprises fulfill their statutory duties, and more accurately align pricing with expected financial performance and the risks of loans under- underlyings.”
Not everyone is concerned about the potential for widespread defects. Industry experts have pointed out that default risk and the risk of declining property value are still contained despite the new FHFA fee structures. The changes only “slightly” reduce fees for first-time borrowers and do not lower the underwriting standards that were put in place to avoid a collapse to 2008 levels. So future owners still have to meet various qualifications to get a mortgage.
“Post-financial crisis regulations, such as the repayment capacity rule, which prevents a return to the subprime days, remain in place. Therefore, there will likely be no decline in credit quality,” said a spokesperson for the National Association. real estate agents (NAR) said Newsweek.
Nunziata agreed, adding that credit scores are just one factor in the underwriting process and that lenders also assess the loan’s income, assets, job stability, housing and payment history. rent, among other things. These assessments will still be in place when the May 1 changes go into effect.
NAR also said the “eat the fee” cuts would only move borrowers who were already planning to buy from the Federal Housing Administration (FHA) to the FHFA. Thus, it would not introduce a new wave of buyers and therefore “should not lead to an increase in defaults”.
Still, the trade association said the mortgage changes continue to pose a problem for middle-income borrowers, who will find it more expensive and harder to own a home under the new rule.