? The Fastest Four Minutes in Finance: Biden Administration Mortage Fees
You’ve probably heard some chatter about?new rules?being implemented by the Biden administration that will?increase fees on new mortgages ???It’s become a hot-button political issue. So, on today’s Fastest 4 Minutes in Finance, we are going to try to offer some clarity.
The rules, which went into effect May 1st, will?change the fee structure charged by Fannie Mae and Freddie Mac.?Those are the government-sponsored organizations that are responsible for about 50% of mortgages in the United States. So, if?affects a lot of homebuyers.?
The?fees will go up on borrowers with good credit scores, and?go down for borrowers with riskier scores.?As an example, a buyer with a score of 740 and 15% down payment would have paid 0.25% on their mortgage. That is now going up to 1%.?
A borrower with a score of 640 with a 15% down payment is going from 3.25% to 2.5%.?
So, while the borrower with a lower credit score is still going to pay more for their mortgage, the?new rules do seem to penalize someone who has built up good credit, at a time when homes are becoming more difficult for first time buyers to afford.?
Mark Calabria, who ran the Federal Housing Finance Agency under President Trump, told Financial Advisor Magazine that buyers with weak credit and low down payments are especially vulnerable to default, and "it’s the equivalent of putting someone out there in a rubber dingy during a tsunami."???
With recession risk and interest rates rising, and some banks failing it does seem like?a bad time to potentially issue riskier loans.?
At the same time,?home ownership is becoming a pipe dream for many younger people.?
According to a survey from Lending Club Corp., almost?two-thirds of Gen Z, defined as 26 years old and younger, were living paycheck to paycheck in March.?That’s an 8% increase from a year ago.?
That means they have?no emergency savings?and would be immediate debt if an unexpected cost arose. Higher inflation has driven up the cost of even basic necessities, at a time when these younger Americans are starting out and making lower incomes.?
Not only are they not saving money, but they are?putting more on credit cards.?Credit card debt reached an all-time high earlier this year, and recent data suggests?delinquency rates are on the rise, which would affect credit scores.?
The fee changes instituted this week clear a path to homeownership for more people.?
Vanessa Perry, a professor at George Washington University School of Business told Bloomberg News,"it’s not the case that every category of person with good credit will pay more. There’s not that sort of direct relationship here and it does not affect any particular category of borrower across the board."She says this is an?effort to adjust risk-based pricing, or in other words, to re-estimate the cost associated with bearing those risks.?
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However, it is?shifting that cost in part, to those with good credit.?There’s no question that sometimes low credit scores are not exclusively a result of poor money management. But, at the same time,?good credit scores are a good sign that mortgages will not go delinquent.
It’s possible the fee changes will not be significant enough to further damage the economy. The better question is?why would we even want to take that chance??
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