Why is the Middle Class Being Squeezed Out of the Home Buying Market?

Why is the Middle Class Being Penalized on Their Next Home Purchase?

The same week that President Biden announced his run for re-election, he also announced, on behalf of the Federal Housing Finance Agency (FHFA), a new Federal rule that mandates homebuyers with good credit scores to pay a higher interest rate on their mortgage for a home purchase.

This extra cost is to offset and lower the mortgage interest rate for those who have lower credit and deemed a high-risk borrower. This ruling, which goes into effect May 1, 2023, is part of the Administration’s plan to make home ownership more accessible for low-income buyers who may be high-risk borrowers.

Wealthy individuals, or those with capital and reserves, who are able to pay cash for a home, are not affected by this mandate. It is the Americans in the middle of this economic chasm that bear the burden of this higher rate. This is adverse to conventional lending practices for those who maintain a solid credit rating (typically 680 and above) to benefit by lower interest rates.

Low income does not necessarily equate to a low credit score (high-risk borrower). In addition to FHA, VA and CalHFA loans, there is a myriad of existing programs, on both a State and Federal level, to help financially challenged individuals and families to afford a home purchase.

For those who can not afford a mortgage at the rates previous to May 1st, there is a high likelihood, that these "high-risk” borrowers, will still not be able to afford, or qualify, for a mortgage, even though these rates have been reduced specifically to accommodate their foray into home ownership.

This becomes a bit complex as Loan-Level Price Adjustments (LLPA), which basically are risk-based price adjustments, are factored in. Credit scores are only one factor in the underwriting process. Lenders also evaluate a borrower’s eligibility that include job stability, income, assets, prior housing and rent payment history.

In response to the widespread backlash of this ruling, FHFA Director Sandra L. Thompson said, "A portion of their fees are ‘upfront’ fees that are based on risk characteristics of the borrowers and the loans they are obtaining. Said differently, the Enterprises engage in risk-based pricing to, among other things, better ensure their safety and soundness, protect taxpayers, and serve their mission,” in a statement released on April 25, 2023,”…The objectives were to maintain support for purchase borrowers limited by income or wealth, ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time.”

The statement continues, "…in January, we announced a recalibration of the upfront fees for most purchase and rate-term refinance loans. These actions work collectively to create a more resilient housing finance system.”

These changes made by the FHFA to the pricing framework of government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, are just one example of the onslaught of changes that affect the housing sector and dip into the pockets of the Middle Class. The rich are getting richer, the poor are getting poorer, and the Middle Class appears to be subsidizing both sides.