New federal rule is going to make it more expensive to buy a home.
Not because you make more money, but simply if you have good credit,
comes at a time when mortgage rates are already above 6%.
>> Yeah, you just heard that correctly.
Believe it or not, a new rule that was decided unilaterally by the Biden
administration penalizes homebuyers who have higher credit scores and
pay large down payments.
The stated objective is allegedly equity in the housing market by charging
less risky borrowers higher fees that would theoretically subsidize
riskier borrowers who have lower credit scores and smaller down payments.
The new policy has to do with something known as loan level price adjustments,
or LLPAs, which are imposed by Fannie Mae and Freddie Mac,
the two entities that guarantee the vast majority of new mortgages.
LLPAs are fees that get tacked onto mortgages, and they vary among borrowers.
Traditionally, the fees are calculated based on credit scores and
the size of the borrower's down payment.
But Biden is changing all of that.
>> Understand what's going on,
you need to familiarize yourself with a term called loan level price adjustments.
These were introduced 15 years ago after the mortgage crisis to compensate for
the risks of lending money.
Basically, this allowed lenders to charge fees based on the likelihood that someone
was not going to pay back their loan.
Generally, the lower the credit score, the higher the risk the borrower is and
the higher the score, the lower the risk.
Seems common sense, right?
Well, in January of this year, new changes were put in place that
would level the playing field between good credit and bad credit.
And starting May 1st, the biggest benefits would go to those with bad credit.
Of course, this inevitably winds up getting spun around.
It is Biden redistributing high risk loan costs to homeowners with good credit,
which is kind of true, but it's not the entire picture.
Just to show you a before and after, if you have the 640 credit score and
put 25% down, you'd previously have to pay a fee of 2.75%.
Now that same borrower will only have to pay a 1.5% fee.
On the other hand, if you have a 750 credit score and put 25% down,
you used to be charged a 0.25% fee and now you're gonna have to pay a 0.375% fee
unless your credit score is above 780, in which case everything stays the same.
>> Yeah, that sounds like a regressive tax that punishes people with good credit and
I just don't get it.
So to recap, under the old traditional lending model,
homebuyers with high credit scores and larger down payments paid less in fees
because someone with good credit is less likely to default on their mortgage.
Higher down payments also translate to lower monthly mortgage payments,
which reduces the monthly housing costs for the borrower.
That also makes it less likely that the borrower will default on the loan.
On the other end, borrowers with lower credit ratings and
smaller down payments pay higher fees or paid higher fees because they're
riskier to lend to, they have a higher likelihood of defaulting on the loan.
And lenders charge those higher fees to those borrowers to essentially hedge
their bet.
But under Biden's new rules, that all changes, and
I think it's critical to give you some specific examples of just how costly
this can be for those with good credit.
Before we get to that, I'll start with the theoretical good news for
people who could benefit from this.
According to Mortgage News Daily, the effective penalty for
having a credit score under 680 is now smaller than it was.
If you have a score of, let's say, 659 and are borrowing 75% of the home's value,
you'll pay a fee equal to 1.5% of the loan balance,
whereas you'd pay no fee if you had a 780+ credit score.
Before these changes, you would have paid a 2.75% fee.
All right, well, let's give you another example.
Let's say on a $300,000 home loan, that savings and
fees would amount to nearly $4,000, pretty good.
But that lower fee is made possible because borrowers with
scores ranging from 680 to 780 will see a spike in their mortgage costs.
In fact, applicants who saved for
a 15% to 20% down payment will experience the biggest increase in fees.
Just take a look at this chart to see how things have changed under the new Biden
rules.
Okay, so the green and
yellow cells represent the borrowers who will see a decrease in their fees.
And just notice how the greenest cells are shown in areas where the buyer has a lower
credit score and of course a smaller down payment.
Orange and red cells represent where mortgages will be more expensive due to
increased fees, meaning those with higher credit scores and bigger down payments.
For example, a buyer with a 620 FICO credit score and
a 5% down payment gets a 1.75% fee discount and that's pretty significant.
It's a significant decrease from the old fee rate of 3.5% for that bracket.
But again, that comes at a price.
A homebuyer with a 740 FICO score and
a 15% to 20% down payment will face a 1% surcharge
compared to the old fee of just 0.250%.
Now the fees can be front loaded as a lump sum that's included in the closing costs,
or the borrower can bake the fees into their monthly mortgage
payment throughout the lifetime of their loan.
And if you think the fees are negligible, you'd be mistaken.
According to David Stevens, who served as Obama's Federal Housing Administration
commissioner, the costs are freaking significant.
On the low end, monthly payments will rise by about $40 if the borrower
with good credit is purchasing a $400,000 home at a 6% interest rate.
By the way, interest rates are above 6% at this point.
We're just giving you the 6% interest rate, for examples, sake.
Now over the lifetime of that loan, the additional cost to subsidize
Americans with bad credit amounts to $14,400 for the borrower.
Again, that's on the low end of the fee increases.
If you live in a big city like Los Angeles, you'd be hard pressed
to find a home at $400,000 or even below $750,000.
So you'd obviously pay more than $40 a month in fees.
So for example, on an $800,000 home, the borrower with good credit would pay nearly
$30,000 in additional fees throughout the lifetime of that 30 year fixed mortgage.
Look, there are several issues with this new Biden rule.
For one, it's being marketed as some sort of tax the rich policy that makes
it seem like the new system redistributes wealth from fabulously wealthy
tax dodgers in order to make home buying within reach for more Americans.
But those with credit scores above 780, for
some reason won't be charged additional fees.
And do the fee decreases for those with bad credit,
make all the difference in making housing more affordable?
The answer to that is no.
>> As you can see, borrowers in the middle wind up paying 0.75% more than before,
while borrowers in the lowest credit tiers see a marginal savings.
Now, don't get the wrong idea, because people with bad credit still end up paying
more in fees than people with good credit.
But people with good credit now get less benefit than they did before, and
people with bad credit end up seeing a slight savings.
It's kind of like in really simple terms, if the house is $100,
a person with good credit would pay a $1 instead of paying 0.25, and
a person with bad credit would pay $2.85 instead of paying $3.25.
>> Honestly, this just looks like the Biden administration is
doing the banking industry a solid by green lighting
more fees under this facade of housing affordability.
Even David Stevens, again, the guy who worked for
the Obama administration, thinks this is a bad idea and
argues that it's unlikely to work in helping people afford homes.
>> Scott Bolden's here, former chair of the Democratic Party in DC.
I get the idea of the campaign promise to get the rich to pay their fair share,
but aren't there going to be a lot of folks in the middle class who have just
been responsible and have good credit who are gonna also be caught up in this?
>> Yeah, it's like a penalty for good credit and putting a high down payment.
>> If you wanna make it income tested, fine.
How are you making a credit score test?
I just don't get it.
>> By the way, Stevens also says that this confusing approach won't work and
more importantly, couldn't come at a worse time for
an industry struggling to get back on its feet after these past twelve months.
To do this at the onset of the spring market is almost offensive to the market,
consumers and lenders.
He's right.
For one, the credit rating metric being used to
calculate new fees say little about the income or
wealth of those borrowers getting hit hardest by the changes.
Look, having a higher credit score doesn't mean that someone's rich.
It just means that they manage to pay their bills on time.
It also means that they have a decent debt to credit ratio, meaning that their
available credit is greater than their outstanding financial liabilities.
A borrower with good credit could be a teacher making
$60,000 a year who pays off their credit card in full each month.
Does that person really need to pay higher mortgage fees to subsidize
riskier borrowers?
Income isn't even factored into credit scores.
As John Ulzheimer, who used to work for FICO and Equifax notes,
income isn't considered in credit scoring systems.
Really? So our wages and
salaries aren't weighed in at all?
Income isn't even on your credit reports, so it cannot be considered in credit
scores, because credit scores only consider what's on your credit reports.
In fact, no wealth metrics are factored into your credit scores.
So this really isn't about redistributing wealth from billionaires to the poor.
This actually pits working Americans against one another and
deepens resentment and division.
I think we've had enough of that.
By the way,
Stevens was also subtly touching on something I'm extremely worried about.
The new fee structure encourages underwriters to engage in riskier lending
at a time of outrageously inflated housing prices and high interest rates.
And was old enough to remember the outcome of George W Bush's
administration pushing policies with similar objectives.
It culminated in a housing market collapse in 2008.
Back in December of 2008, the New York Times blamed Bush's housing policies for
the crash.
I'm gonna read a few excerpts from their reporting at the time.
They wrote that Bush pushed hard to expand home ownership, especially among
minority groups, an initiative that dovetailed with both his ambition to
expand Republican appeal and the business interests of some of his biggest donors.
He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for
low-income lending.
Concerned that down payments were a barrier, Bush persuaded Congress to spend
as much as $200 million a year to help first time buyers with down payments and
closing costs.
By the way, Biden isn't even doing that.
And he pushed to allow first time buyers to qualify for
government insured mortgages with no money down.
The lenders doled out loans to risky borrowers,
packaged up these toxic mortgages into securities that were traded in
the stock market, and then proceeded to bet against them because
the banks were fully aware of the high likelihood of defaults.
Not only did the banks profit from shorting mortgage backed securities,
they also took ownership of foreclosed homes.
Now is Biden setting the stage for a repeat of that mess?
Whether wittingly or unwittingly, he's certainly increasing the likelihood.
Let's take a look at an example, comparing two mortgages on a $400,000
home with the same 6.5% interest rate in California.
These calculations include property taxes,
which are actually relatively low in the Golden State.
Now, take a look at this graph.
The first example or this screen grab.
The first example features a borrower who put 20% down and financed the rest.
Because of the larger down payment, this borrower was able to
secure a $2,526 monthly payment through a 30 year fixed loan.
So now let's compare that with someone who pays a far smaller 5% down payment.
If you look at that, their monthly payment is obviously more of a burden
because it shoots up more than $500 a month to $3,064.
And that's assuming the borrower scored the same interest rate as the person
who paid a 20% down payment.
And in reality, someone with a lower credit score and
smaller down payment would get charged a higher interest rate, meaning that
their monthly financial burden would actually be more overwhelming as a result.
And however much they didn't contribute toward a down payment would need to
be financed.
That also benefits banks through interest rates.
They would have to pay more in interest as a result of having
to finance a larger amount.
Now encouraging lending to riskier borrowers at
a time of astronomical home prices and high interest rates,
increases the chances of another wave of foreclosures.
Cash buyers who tend to be institutional investors salivate over that type of
housing market crash because they get to swoop in and purchase homes at a discount.
And while the liberal pro Biden, pro media,
echo chamber has mostly ignored covering this new rule,
I made sure to do the appropriate research and make sure that I got the story right.
Right now, the right wing is using this story for their own political purposes,
but we shouldn't care about that.
What we should care about is how Biden's policies are impacting
ordinary people who are already struggling to buy homes.
>> The unfortunate reality, Becca, is that it really isn't gonna be that effective.
FHA is still a better rate for those low credit score borrowers.
So we're going through this set of steps, and all it's going to end up doing is
raising costs to a bunch of borrowers who are sort of traditional GSE borrowers.
But the FHA will still be a cheaper rate for
a borrower with a credit score below 700 and a very low down payment.
So it really accomplishes little other than a really
disrupting a tradition around risk based pricing that Fannie and
Freddie have been committed to ever since their inception.
>> And look, I don't get any of this either, right,
because it's not about looking at income, it's not about looking at wealth.
Biden made a decision to focus on credit scores, again,
that does not at all factor income.
Biden has done nothing to make the price of housing more affordable.
Low supply is a huge reason why homes are expensive,
Biden hasn't adequately addressed that at all.
And while we haven't built more housing to drive down the costs of homes,
Biden also hasn't improved economic conditions like
wages that would make home buying easier for Americans.
Maybe addressing root causes rather than implementing
regressive fees is a better approach.
Biden hasn't done a damn thing to regulate, or in my opinion,
he should ban institutional or foreign investors from statching up the limited
supply of homes on the market, which again, also drives up prices.
But I don't know, maybe that's the point.
He's not only pitting middle class and working class Americans against
each other, considering the burdensome cost of owning a home,
he's also setting risky borrowers up for failure.
And I don't understand why he wants to do this.
Now, I think there's a reason why liberal corporate media has
stayed away from this story.
It's not exactly politically beneficial to tell people who worked
really hard to keep their credit scores up that they will be punished for
that in order to subsidize the loans of riskier borrowers.
The right wing uses it for political purposes.
But I'm sharing the facts with you because this is exactly what mainstream
Democrats do whenever there is a crisis having to do with the economy.
There's, like, a little bit of change around the edges.
They market the change as if it's going to benefit low income individuals or
minorities who have been locked out of the housing market.
But at the end of the day, they don't actually do that at all.
Even if the people who stand to benefit from this policy, see a slight decrease in
the fees that they have to pay for their mortgages, their mortgages are still
gonna be super expensive because housing is super expensive.
We need to do something about that.
And the resentment that this is gonna lead to isn't exactly helpful in the country,
especially with the climate that we're currently dealing with,
the anger that Americans are facing.
This is just more fodder for the destructive and
divisive rhetoric that we hear from the right wing.
Why would the Biden administration give that to them?
You wanna make housing affordable?
Then make housing affordable.
Don't punish people who despite all of the challenges that we're facing
in this economy, manage to keep their credit scores up.
Just cuz you got a good credit score, doesn't mean you're rich.
And I don't think those people should be punished with paying higher fees.