Why having good credit could cost you more on a home loan

Yesterday, the Federal Housing Finance Agency directed lenders Fannie Mae and Freddie Mac to adjust their loan pricing to raise costs for well qualified borrowers and lower costs for some less qualified borrowers. FOX 5 real estate expert John Adams joined Good Day to unpack all the changes.

The Biden Administration wants to make it easier for borrowers with less than spectacular credit scores to get approved for a loan. That aspiration is well and good, and Adams agree that we should try to make homeownership more affordable.

The problem is that, by making "subprime" loans less expensive, Fannie & Freddie will lose income, and they’ve got to make it up somewhere.  So the government’s suggestion is to charge well-qualified borrowers a little more.

It's not a big increase. It’s about $10 per month more per $100,000 borrowed, so the average well-qualified borrower will end up paying about $20 to $30 more per month.

So why are so many people crying foul?

1. Subprime loans of 2008

This policy is suspiciously similar to the programs that provided "subprime" mortgages in 2008, which caused loans to be approved for high risk borrowers, brought about the collapse of housing prices, and led directly to the Great Recession.  Some economists claim this cost shifting policy ignores the realities of creditworthiness.

2. Ignores risk-based pricing model

After the Great Recession, lenders were required to tailor financial products to the credit risk profile of borrowers. One of those changes was a greater reliance on credit scores as a "racially blind" measurement of risk.  Any behavior that is rewarded will only cause more of that behavior. Having a low credit score is evidence of poor credit behavior.

3. Seem un-American

It is a reality that many Americans of all races and ethnicities have worked hard to build their credit profile over the years.  They deserve to be rewarded with more affordable credit products simply because they, in fact, present less risk to the lender.  That’s just common sense.  In addition, our housing system rests on the bedrock principle that individual financial responsibility should be rewarded.   

The bottom line is Adams believe that the government and the lenders aren’t doing any borrower a favor by qualifying higher-risk borrowers for a loan that they may not be able to afford.  This policy conflates credit scores with wealth, and unfairly maligns hard-working Americans in the lower-income bracket.  Financial education is the key to this issue.

John Adams is a real estate expert with Columbia Asset Management, LLC and contributor to Good Day Atlanta.