Risky Business: New Pricing for FHA?
One of many proposed changes to FHA lending is the implementation of risk-based pricing. Most of us are familiar with this practice if not the term for it. For example, when you get your car insurance, your rate is partially determined by your driving record, where you live, and the kind of car you drive. No one expects to pay the same for insurance as someone else. If you live in a quiet suburb, drive a 4-year-old station wagon, and the only ticket you ever got was for forgetting to feed a parking meter, your rate is lower than your big-city friend with the new ‘Vette who’s on a first-name basis with the traffic court judge. “Pay to Play” makes sense to most people in that context.
The same thing is happening with housing. Fannie Mae and Freddie Mac started the trend, charging more or requiring larger down payments for homes in declining areas, for borrowers with lower credit scores, and for financing certain types of property like manufactured housing and condo projects. The idea is to have the borrowers with the greatest chance of defaulting pay more instead of forcing everyone to absorb the cost of the rise in foreclosures.
So what does it mean to borrowers who choose an FHA loan?It depends. FHA’s costs have increased, in fact for the first time in its history the agency will be unable to cover losses caused by borrower defaults. So more money is needed, and it can come from either the taxpayers, from all FHA borrowers in the form of across-the-board fee increases, or in the form of a selective increase to those who are at higher risk of defaulting. So if you have good credit you won’t likely be hit with an increase in funding fees if this change goes through. Riskier borrowers with marginal credit histories would be expected to come up with a little more.
Tags: credit rating, FHA, mortgage pricing, mortgage rates, mortgage reform, risk-based pricing
