FHFA cancels DTI mortgage tax. What it means for home buyers.
To the relief of many, the Federal Housing Finance Agency (FHFA) has canceled its plan to change a mortgage fee for people with certain debt-to-income ratios.
The fee would have been imposed on certain borrowers with debt-to-income (DTI) ratios above 40%. DTI is the portion of your monthly pre-tax income that is used to pay recurring debt, including mortgages, rent and credit card balances. This new fee was supposed to take effect on May 1, with other changes based on credit score and loan size, delayed until August 1 due to the industry downturn, and now phased out as of Wednesday.
“It was clear from the beginning that this upfront fee would hurt future mortgage borrowers,”[ads1]; said Warren Davidson, Ohio congressman and chairman of the House and Insurance Subcommittee.
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How would the DTI relationship fee have hurt borrowers?
Borrowers with a DTI ratio above 40% would have had to pay an additional fee of 0.375% on their mortgage that Fannie Mae and Freddie Mac would acquire.
∙ On a $300,000 loan that would have translated into an upfront fee of $1,125. Or if a borrower couldn’t pay that and opted for a higher rate instead, it would cost an additional $24.75 a month. Over 30 years, that would mean an additional $8,910.
By itself, a DTI ratio also isn’t a strong indicator of a borrower’s ability to repay loans, said Robert Broeksmit, president and CEO of the Mortgage Bankers Association, an industry group.
“There’s also the unfairness issue,” said Andrew Ryan, chief sales officer at Cornerstone Home Lending in California. “A couple could have a near-perfect credit score, no credit card debt, pay their bills on time, but through no fault of their own have a DTI rate of 41%,” and have to pay the fee, he said. “the fee makes the DTI ratio even higher.”
Other agencies such as Veterans Affairs, the US Department of Agriculture and Federal Housing Administration loans allow a 50% DTI ratio with no mortgage fee adjustment, Ryan said. “So, FHFA for Freddie and Fannie (loans) are out of whack.”
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How would the DTI relationship fee have hurt lenders?
Income and expenses can change several times throughout the loan process, “especially considering evolving assumptions about the nature of debt and income, and the growth of self-employment, part-time work and employment in the ‘gig economy,'” Broeksmit wrote in a letter to FHFA Director Sandra Thompson in February.
These changes can cause the DTI ratio to fluctuate, which can mean more changes in a borrower’s loan pricing. And it can mean difficulties in complying with rules on loan audits or delays in the closing process.
Lenders were also “concerned that more rate changes could jeopardize borrower confidence and lead to the appearance of a ‘bait and switch'” when offering loan rates, Broeksmit said.
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What will be next?
Now that fears over the DTI relationship fee have subsided, concerns remain about fee changes based on credit scores and down payment sizes that came into effect on May 1.
These fee changes resulted in some people with high credit scores paying more than they would have before May 1 – but less than if they had low credit scores. The penalty for having a lower credit score shrank from what it was before May 1.
“Congress will now take action to end this tax on creditworthy borrowers,” said Representative Patrick McHenry, a North Carolina congressman and chairman of the House Financial Services Committee.
While some members of Congress are looking to dismantle those fees, FHFA says it is now moving forward with more discussions with industry stakeholders about setting fees and gathering public input. It said it will soon release details of an upcoming request for input on a pricing framework for fees.
Medora Lee is a USA TODAY money, markets and personal finance reporter. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
