President Joe Biden’s new mortgage plan has raised questions about whether the pricing adjustments, which will raise mortgage fees for borrowers with strong credit while lowering fees for higher-risk borrowers, could impact property values down the line.
The new Federal Housing Finance Agency (FHFA) rule, which will go into effect on May 1, is part of the administration’s push to make home ownership more accessible for first-generation and low-income buyers, who tend to be people of color, but it has sparked a debate about whether it could cause an increase in defaults on mortgages and cause a downturn in property values.
“Many high-risk borrowers brought in under the plan will buy homes in low-income neighborhoods,” The Wall StreetJournal‘s editorial board wrote in a Saturday op-ed. “The working-class families who already live in those neighborhoods worked hard and saved for their homes. If their new neighbors default and face repossession, nearby homeowners may see their property values fall.”
Joe Nunziata, the co-CEO of Orlando-headquartered lender FBC Mortgage, told Newsweek that because low credit scores can show up in low-income and high-income neighborhoods, the risk of default doesn’t only affect low-income neighborhoods. Instead, there’s potential for the impact to be felt in “all neighborhoods.”
While it’s possible that hypothetical defaults could adversely affect a neighborhood, “it would take more than a few such defaults,” Stephen Malpezzi, a real estate professor at the University of Wisconsin-Madison, told Newsweek.
“There’s a nonlinear relationship between the number of concentrations of initial defaults, and spillovers to neighbors,” Malpezzi said.
A 2008 study published in the Journal of Housing Economics analyzed the then-national mortgage crisis by looking at property sales and foreclosures in New York City to establish what extent foreclosures drive down neighboring property values. Although researchers, in general, found that “properties in close proximity to foreclosures sell at a discount,” lower property values are not the direct result of nearby foreclosures.
On Tuesday, FHFA Director Sandra Thompson reassured the public about the new rule, saying in a press release that the steps taken to update the pricing framework of Fannie Mae and Freddie Mac (federally backed mortgage institutions know collectively as the Enterprises) “will bolster safety and soundness, better ensure the Enterprises fulfill their statutory missions, and more accurately align pricing with the expected financial performance and risks of the underlying loans.”
Not everyone is concerned about the potential for widespread defaults. Industry experts stressed that the risk of default and risk of downturn in property values are still contained despite the new FHFA fee structure. The changes only lower fees “slightly” for entry-level borrowers and didn’t lower underwriting standards that were put in place to prevent a 2008-level meltdown. So, prospective homeowners still need to meet various qualifications to obtain a mortgage.
“The post-financial crisis regulations, such as the Ability to Repay rule, which prevents a return to the subprime days, remain in place. Consequently, there is likely won’t be a decline in credit quality,” a spokesperson for the National Association of Realtors (NAR) told Newsweek.
Nunziata agreed, adding that credit scores are only one factor in the underwriting process and that lenders are also evaluating a borrower’s income, assets, job stability, prior housing and rent payment history, among other items. Those evaluations will still be in place when the May 1 changes go into effect.
NAR also said “eat the fee” reductions would only move borrowers who were already planning to buy from the Federal Housing Administration (FHA) to the FHFA. So, it wouldn’t introduce a new flurry of buyers and thus “should not result in an increase in defaults.”
Nonetheless, the trade association says the mortgage changes continue to present a problem for middle-wealth borrowers, for whom it will be more expensive and harder to own a home under the new rules.