The Federal Housing Finance Agency (FHFA) has decided to delay the implementation of the upfront fee on Fannie Mae and Freddie Mac borrowers with higher debt-to-income (DTI) ratios. This move has given a breather to mortgage lenders who were lobbying for an alternative that would eliminate the DTI-based loan level pricing adjustments. The Community Home Lenders Association (CHLA) has taken a similar position and called for the FHFA to consider a full repeal of the DTI fee.
The DTI can change throughout the mortgage application and underwriting process, and the FHFA’s new fees will inevitably lead to changes in borrowers’ costs between application and closing, requiring multiple redisclosures that will increase compliance costs and confuse borrowers. This is especially problematic for self-employed buyers who may see their DTI ratio change from the application to closing.
The delay in implementing the DTI-based fee is to ensure that all lenders have sufficient time to deploy the fee, according to the FHFA. It also gives lenders more time to work through the operational and compliance challenges of implementing a DTI-based LLPA. However, lenders are still concerned that the fee won’t be tenable when it finally goes into effect, whether that’s in May, August, or in 2024.
The DTI ratio is not a strong indicator of a borrower’s ability to repay, as noted by the revised definition of the general qualified mortgage. Lenders and trade groups argue that the fee is misguided and will push more people into private financing, such as jumbo-type financing, even on conforming loan amounts.
With profits already squeezed or in some cases non-existent and volume half of what it was a year ago, lenders can’t afford to take pricing hits because they are unable to fully pass on the LLPA to consumers due to fears of potential TRID violations. The delay in implementing the fee provides the industry more time to convince the FHFA to walk back this policy.
While the FHFA’s decision to delay the implementation of the upfront fee on Fannie Mae and Freddie Mac borrowers with higher DTI ratios is a victory for the industry, it is only a partial one. Lenders and trade groups continue to lobby for an alternative that will totally eliminate the DTI-based loan level pricing adjustments. The delay in implementing the fee gives lenders more time to work through the operational and compliance challenges, but they are still concerned that the fee won’t be tenable when it finally goes into effect.