June 19, 2023

Americans with good credit are being penalized while bad credit habits are being rewarded. To impart more social justice into the home ownership market, President Biden has implemented a new policy which can penalize home buyers with good credit and rewards those with less-than-good credit.

In short, conventional mortgage borrowers with good credit could pay larger loan-level pricing adjustments (LLPAs) on their mortgages. The same fees for borrowers with worse credit will be reduced from previously higher levels.   

Under the new program, a borrower with a 740 credit score and a down payment around 20% will pay a 1.0% LLPA, or four times the prior rate of 0.25%. At the same time, the LLPA for borrowers with worse credit will be slashed by half or more. A borrower with a credit score of less than 640 and borrowing 97% of the purchase price will see their LLPA slashed to 1.75% from 3.5% percent.

The high credit score borrower purchasing a median price $546,000 home in Riverside, CA, will pay an LLPA of $3,276. That amounts to an extra $20.71 per month to finance that 6.5% mortgage over the course of 30 years.

The overall impact is to increase the cost of credit for those with good credit and lower the cost of credit for those with bad credit. Apparently, fundamental societal inequity is why there are credit access issues, not financial choices made by individuals.

Is redistributing wealth the answer? If politicians truly wanted to help, they’d teach people how to accumulate wealth and attain credit. Also, they’d curtail programs that funnel huge sums of money to housing subsidies, guaranteed mortgages, and mortgage-backed securities.

All in all, the government is not rewarding the right behaviors. It’s led to problems – housing being one of them.