No, Biden isn't punishing you for your high credit score (Amendment)

On the previous post, commenter David Sorber very helpfully noted that the reason I couldn’t find pre-2008 fees is because we didn’t have them!

My recollection is that loan-level price adjustments were first introduced in 2008. In my opinion, they have no relation to actual loan losses and should be abolished.

And, I happened to be reading an article today from David Dwarkin at the National Housing Conference that corroborates David’s comment:

These fees never existed before 2008 when they were designed to increase payments to the Treasury Department, cover losses during a time when the GSEs were still bleeding cash as a result of the terms of their conservatorship, offset the protection historically afforded by mortgage insurance at a time when the mortgage insurance industry was in an existential crisis, and discourage all but the most pristine borrowers from becoming homeowners. None of these conditions exist today. Since then, LLPAs have morphed into a tool to build the GSEs’ capital accounts so they can someday be removed from government conservatorship, largely at the expense of those homebuyers who can least afford it.

It’s clear that LLPAs and risk-based pricing have outlived their usefulness. The mortgage insurance industry is healthy and better regulated than ever, credit standards for all borrowers still far exceed those that predated the financial crisis of 2008, and GSE guarantee fees remain the appropriate place for investors to pay for the guarantee on the timely payment of principal and interest on the mortgage-backed securities that make this market so liquid and efficient. If we want a fair deal for first-time homebuyers of all incomes, then we should charge everyone the same rate, as we have for over 80 years, and as FHA still does today.

It’s even worse than I thought!

What’s odd is how the FHFA describes all these sorts of fees as a way to make sure they remain fully capitalized. But the only reason they need capital is because the federal government has syphoned away all the excess profits that come from all these fees. This is a whole topic that I haven’t even gone into here at the substack newsletter. It’s a whole drama for another day. Taxpayers never really needed to invest a penny in Fanny and Freddie, and the idea that we did, to the order of $200 billion, give or take, is just accounting hocus-pocus. (Long story short, the federal government invested $200 billion of capital in the GSEs, and the GSEs used that capital to….. buy treasuries. Voila! A $200 billion “capital buffer”, at the expense of the taxpayer, don’t you know, was born.) Of course, the conventional story also fuels the anti-mortgage sentiment that keeps working class home buyers on the sidelines.

David Stevens, who was quoted in the articles that blew this topic up responds to David at Linkedin with:

The amount of the charge is not relevant here - It’s the principle. And I wish NHC and others would try to be less politically respectful to the left and address the real issue here. This is and was cross subsidization.

You want this to go away? Tell the truth!

But, I haven’t seen anyone counter Dwarkin’s points, that these fees are leftovers from a long distant crisis in addition to risk-based spreads. And, given that, I can’t imagine how they could ever be described as cross-subsidies.

One thing to keep in mind is that the 2008 crash was broad-based. Readers of this newsletter and my books have seen some of the evidence about the period. Notably, in spite of the common rhetoric, the rise in defaults weren’t particularly credit score sensitive. This was not a crash that would lead one to ramp up fees based on credit score.