Orange County homeowners who have a credit score of 680 or higher can expect to pay an additional $40 per month on a new $400,000 mortgage under a new Federal Housing Finance Agency policy regarding the loan-level price adjustment (LLPA) fee, according to experts.

“It will have an impact on Orange County in particular because a lot of the people who are interested in buying houses are going to meet the requirements to get this surcharge,” said Santa Ana attorney Michael Rubino of the Law Offices of Michael Rubino.

The money collected will go to Freddie Mac and Fannie Mae to supplement the mortgage payment of homeowners who have lower Credit ratings.

“It will effectively hurt people with better FICO scores who have done responsible things and help out, in theory, people who are less likely to pay on time and overuse their credit and if that has the effect of getting houses for a small amount of people who shouldn’t be buying houses, what it will do in the long run is increase the default rate probably,” Rubino told OrangeCountyLawyers.com.

A bigger concern about the policy is that it could lead to a financial collapse that’s equal in proportion to the 2008 housing crisis. It’s been widely reported that the housing market crash of 2008 was partly caused by high levels of debt and a lack of regulation.

“We are in one sense ignoring the lessons that 2008 taught us by not vetting the ability of owners to enter into these encumbrances and to purchase these homes,” said Natalie Stephan who practices real estate law at Whitney | Petchul law firm in Lake Forest. “You’re flattening the relationship of the credit risk to the credit score’s loan-to-value and you’re not addressing the root issues. So, we’re just going to keep seeing this circle.”

However, Sandra Thompson, director of the Federal Housing Finance Agency, has said higher-credit-score borrowers are not being charged more so that lower-credit-score borrowers can pay less.

“The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment,” Thompson said in a statement online. “Some updated fees are higher, and some are lower, in differing amounts. They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers. Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.”

The new federal policy is designed to increase support for borrowers historically underserved by the housing finance market.

“The administration believes the FICO system is not colorblind and that it is having an adverse effect on black and Hispanic people in getting into the housing market,” said Rubino, who specializes in real estate and business litigation. “But I don’t think it solves that problem because FICO scores are colorblind. Instead, we need to understand why certain classes of Americans are not interested in their FICO score.”

FICO, which is an acronym for Fair Isaac Corporation, is calculated with an individual’s payment history, amount of money owed, length of credit history, credit mix and amount of new credit.

“If investors want a certain rate of return on their money and their mortgage payment is an extra $40 a month, then they will have to charge more rent,” Rubino added. “It will have a negative effect on renters long-term, too because investors want a return on their capital, or they are not going to be able to buy as many properties.”

But organizations like the Homeownership Council of America (HCA) argue that underserved communities are a missed opportunity for lenders because there are 10 million mortgage-ready home buyers.

“By successfully lending in underserved communities, lenders stand to conservatively increase their loan volume by at least $1.5 trillion,” the HCA website states.

One class of homeowners that the new policy probably won’t impact as much are mom-and-pop landlords, according to Rubino.

“The additional fee is only going to be attached to new properties and a lot of these mom-and-pop people put their properties in a trust and give it to their kids and their kids don’t necessarily want to be landlords, so they sell the property,” he said.

Some 27 states opposing the policy, which became effective May 1, sent a letter to Biden and Sandra Thompson, director of the Federal Housing Finance Agency. Download the full letter here.

States that signed the letter include Alabama, Alaska, Arizona, Arkansas, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, Nevada, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Utah, West Virginia, Wisconsin, and Wyoming.

“[T]he right way to solve that problem is not to use the power of the federal government to penalize hardworking, middle-class American families by confiscating their money and using it as a handout,” the letter states. “The right way is to implement policies which will reduce inflation, cut energy costs and bring lower interest rates.”

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