Biden’s Robin Hood mortgages punish high credit scores

A directive from the Biden administration’s Federal Housing Financing Agency will make mortgages financed through Fannie Mae and Freddie Mac more expensive for low-risk borrowers and cheaper for high-risk borrowers, according to a May 12 report from the Congressional Research Service.

Read the report for yourself: Recent Mortgage Pricing Directive for Fannie Mae and Freddie Mac

While low-risk borrowers will still pay lower Loan Level Price Adjustments than other borrowers, their rates will more than double, compared to the old rate. Loan level price adjustments for borrowers with credit scores between 760 and 779, and paying a 15% to 20% down payment, will be 0.625%, compared to 0.25% before the directive. The loan level price adjustment is tacked onto the mortgage.

For borrowers with credit scores between 640 and 659, and paying a 15% to 20% down payment, loan level price adjustments would fall to 2.25%, down from 2.75% before the directive.

The report explains that the pricing directive “could arguably” serve policy objectives. Among them: “Low-risk borrowers may subsidize some of the costs to insure against the default risk of borrowers with low credit scores.”

This is the Robin Hood mortgage: Low-risk borrowers pay higher rates to subsidize high-risk borrowers. Some home-buyers will be able to afford less of a house, because more of their payment is tied up subsidizing other borrowers.