Q&A of the Day – How the New Mortgage Rule Could Impact You
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station’s page in the iHeart app.
Today’s Entry: Hi Brian, I would like for you to address President Biden’s new mortgage rule. Reports suggest those of us who work hard to maintain good credit will have to pay more to subsidize those with poor credit. Is this true? That’s outrageous if it is! And isn’t incentivizing people who shouldn’t have had mortgages in first place how the housing crisis happened?!
Bottom Line: Your depiction is accurate, and your frustration is entirely warranted in my view. In fact, your frustration is shared by over half of the country as 27 states, including Florida, are contesting the Biden administration's rule change which does effectively punish those who take out mortgages with good credit, but also large down payments, for the direct benefit of those who have lesser credit and who are making smaller down payments. The new rule change was first announced by the administration in late February and took effect May 1st. So as of Monday, every government backed mortgage taken out, which is most of them, is subject to these changes. In proposing the rule changes the Biden administration said this:
Homeownership is currently the principal source of wealth creation for most American households. But due to a nationwide shortfall in the supply of affordable homes and shifting demand for housing during the pandemic, first-time homebuyers have struggled in recent years to achieve homeownership. First-generation homebuyers and first-time homebuyers of color – who are less likely to have sufficient resources for a sizeable down payment due to a longstanding gap in intergenerational wealth transfers – have been particularly affected.
Now, I don’t know about you, but I didn’t receive a dime in money for a down payment on my first house from anyone nor have I been a beneficiary of an “intergenerational wealth transfer” of which there’s now an alleged longstanding gap. I did however buy my first home at 22 with a sizeable down payment because I’d worked my butt off, even while in college, to do it. In any event that’s the justification for this form of social justice/socialistic rule change.
And for what mortgages the rule changes impact:
- FHA, Fannie Mae & Freddie Mac
Most recently, according to the Government Accountability Office, greater than 75% of all active mortgages are backed by one of those three entities. So, the new rule change stands to impact greater than three-quarters of all mortgages going forward. As for what the rule change is and what it does, it’s a bit complicated because there’s a matrix which uses a sliding scale to determine the result. This is the federal government in action seeking to socially engineer outcomes after all. Principally here’s what’s changed:
- The higher the credit score, the higher mortgage origination fees will be
- The lower the credit score, the lower mortgage origination fees will be
- The higher the down payment one makes, the higher mortgage origination fees will be
- The lower the down payment one makes, the lower the mortgage origination fees will be
If it sounds like up is down and down is up it’s not your imagination. As is suggested by the listener who submitted today’s Q&A, this is a practice of the more capable borrowers being forced to subsidize those who’re less capable. It is in effect socialism entering the mortgage market. Various examples have already been run since the rule is now in effect and here’s an idea of what the impact will be for the average borrower in our area via Bankrate.com’s findings:
- A borrower with a 750-credit score taking out a mortgage for $400,000 putting 25% down would pay $375 in additional fees to originate a mortgage
Those additional fees will then be used to lower the fees charged to a borrower with lesser credit and lower down payments. So, give or take a little, that’s about the extra price those with good credit and larger down payments can expect. Something in the neighborhood of $300 to $400. And in theory, that’s how much less those with lesser credit and lower down payments would have to pay over what was necessary prior to Monday. As for the concern about whether this could create another housing crisis styled outcome...
While I believe it to be a dangerous precedent to attempt to socially engineer mortgage origination outcomes, what’s happened here isn’t something which would rise to the level of what we’d seen in the mid-2000's preceding a housing crisis. In reality, how many borrowers are really only $300 to $400 away from being able to afford buying a home and taking on a mortgage? However, if further steps in this direction were to be taken, that might change. For now though, this is just yet another form of government engineered economic redistribution, aka socialism making its way into our system courtesy of President Biden’s administration.