The Biden administration is seeking to widen access to homeownership for first-time and low-income buyers, aiming to reduce some mortgage-related fees as the U.S. contends with its worst housing affordability crisis in decades.

The federal government has been rolling out changes that would alleviate some costs for those borrowers. In one move, the Federal Housing Administration, a popular source of financing for aspiring homeowners, will cut premiums on mortgages insured by the regulator by 0.3 percentage points, saving buyers an average of about $800 a year, according to a White House fact sheet. 

Another part of the government—the Federal Housing Finance Agency—has been adjusting upfront fees charged for loans by Fannie Mae and Freddie Mac in a push to ease another barrier to homeownership, particularly for minorities.

The measures by the government are some of the biggest in at least a decade to try to level the playing field in the mortgage market. The U.S. has long faced a Black-White homeownership gap caused by policies that deprived generations of minorities from building wealth. Inequality has persisted with the surge in home prices in recent years, with some arguing that it was furthered by the $5 trillion refinancing boom that started during the pandemic.

“It moves the needle toward affordability,” Mitria Spotser, federal policy director at the Center for Responsible Lending, said of the Federal Housing Administration premium cuts. “On an immediate basis, I think there are more consumers who will find that the mortgages that they are seeking are more affordable to them.”

First-Time Buyers
Both the mortgage insurance premium cut and the fee waivers underscore the federal government’s push to address inequality. And the moves will help a swath of first-time buyers: The FHA has insured more than 9.1 million mortgages to those consumers since 2009.

Vice President Kamala Harris plans to announce the FHA cuts later Wednesday. More than 80% of FHA borrowers are first-time buyers, and more than 25% are consumers of color, according to the White House.

The other tweaks, from the Federal Housing Finance Agency, affect fees for Fannie and Freddie, the mortgage giants that have been under government control since 2008. 

The government has entirely waived Fannie and Freddie’s upfront fees for first-time buyers with incomes at or below the median in an area and as much as 120% of the average in high-cost areas. The changes went into effect this month. Starting in May, costs will drop for some borrowers with lower credit scores and rise for buyers with higher ones. Regulators are also adding a new fee for certain buyers with high debt-to-income ratios.

Waiving upfront fees could be the equivalent of reducing some borrowers’ rate by a full percentage point, said Shelby Bartelt, a loan officer at Bay Equity Home Loans in Lenexa, Kansas. 

While the efforts will help make it easier for some borrowers to get financing, critics argue it is ultimately a marginal effort to rectify a massive and longstanding inequality. Some experts say it raises thorny questions about the risks of easing credit just as home prices start to fall and a potential recession looms.

FHFA spokesperson Adam Russell said that the fee cuts will make home purchases cheaper for “underserved borrowers.” Fee cuts will be offset by hikes for other borrowers—on loans for second homes for example—to protect the finances of Fannie and Freddie.

Tight Market
Home buyers are facing a tough U.S. housing market these days. Borrowing costs soared last year, sidelining many consumers and leading to plunging sales. The average contract rate on a 30-year fixed mortgage was the highest since November in the week ended Feb. 17, hitting 6.62%, according to the Mortgage Bankers Association.

While prices have eased slightly in recent months, they’re still higher than a year ago nationally, squeezing potential buyers. And those pressures are compounded by the lack of homes for sale. Homeowners with lower borrowing costs are hesitant to give up those rates, contributing to the drop in new listings in recent weeks, according to Redfin Corp.

Inventory may get even tighter as some move-up buyers—homeowners who want a new or bigger spot—have higher credit scores and higher incomes, meaning they may face more fees on new mortgages. That could dissuade those individuals from listing their current homes, said Bill Lowman, chief executive officer of American Pacific Mortgage, a large nonbank lender in Roseville, California. 

Mark Calabria, who ran the FHFA under Trump and is now a senior adviser to the libertarian-leaning think tank Cato Institute, said it’s an especially risky time to be widening the credit box. Buyers with weak credit and low down payments would be most vulnerable to job losses, which could push them into default, he said. 

The conversation should be about how to prepare for a downturn, “but instead this is the opposite: Let’s just put someone out there in a rubber dinghy during a tsunami,” he said.

Vanessa G. Perry, who is a professor at George Washington University School of Business, said she supports the changes but thinks the impact could be limited given the current state of the market and lack of affordable homes for sale.

“It’s an unprecedented set of efforts targeted at historically disadvantaged communities of color,” said Perry, who is also a nonresident fellow at the Urban Institute. “Even though there have been important steps, they can’t do very much good, because there’s not enough units for people to buy.”

—With assistance from Jennifer Jacobs.

This article was provided by Bloomberg News.