Biden Administration Punishes Borrowers with Good Credit

Starting May 1, mortgage fees will increase for borrowers with good credit and decrease for borrowers with lower credit. The changes will make purchasing, refinancing, or pulling equity from existing mortgages more expensive for people with higher credit scores and less for people with lower scores. Multiple factors, including, but not limited to, credit score, loan purpose, occupancy, number of units, product type, and downpayment, will affect the fees. 

Traditionally, a higher credit score translates into a lower interest rate. However, the new changes will throw that financial axiom on its head for many borrowers. The following graphic was included in CBS reporting on the story. The scenario was that both borrowers were first-time buyers putting in the minimum down payment. The difference was one borrower had a higher income and better credit score. The borrower who managed their finances more responsibly and had higher incomes had a higher interest rate. The person with the higher credit score would pay about $65.41 more per month or $23,545.18 more over the life of the loan than the person with the lower credit score. What’s the point of maintaining good credit if you can save $23,000 by not paying your bills? 

The term "Enterprises" frequently appears in the article and refers to Freddie Mac and Fannie Mae. Federal Housing Finance Agency (FHFA) Director Sandra L. Thompson stated that the FHFA “is taking another step to ensure that the Enterprises (Fannie Mae and Freddie Mac) advance their mission of facilitating equitable and sustainable access to homeownership.” Director Thompson is referring to Equitable Housing Finance Plans for Fannie Mae and Freddie Mac, released in June 2022, designed to complement the FHFA’s Strategic Plan: Fiscal Years 2022-2026. The following table of contents for the Strategic Plan: Fiscal Years 2022-2026. 

Director Thompson stated in the June press release, "The Equitable Housing Finance Plans represent a commitment to sustainable approaches that will meaningfully address the racial and ethnic disparities in homeownership and wealth that have persisted for generations. We look forward to working with the Enterprises, lenders, and other housing industry participants to further develop [sic] the ideas described in these plans. 

The objective of Strategic Goal 2 stated in the Fiscal Plan is “Improving affordable housing opportunities and supply for homebuyers and renters – particularly the underserved is an agency priority. "Underserved" is described in Objective 2.1.1, promoting Sustainable Access to Mortgage Credit. "Monitor the Enterprises' efforts to identify specific actions to increase and preserve sustainable mortgage purchase and refinance credit for all qualified borrowers, with additional focus on low- and moderate-income families, communities of color, rural areas, and other underserved populations."

Individuals with means will find alternative purchasing options, like cash or creative financing, to avoid higher fees and interest rates. As the wealthiest buyers leave the mortgage market, the higher monthly payment burden of offsetting the lower-income, higher-risk borrowers will fall primarily on the middle class with slightly better than average credit scores.

In general, people with higher credit scores are more aware of the cost of money. As interest rates rise, wealthier individuals pay cash for houses instead of expensive financing options, and the trends are leaning that way. Cash purchases have increased for six of the last seven quarters. 

In Q4 2022, 11.2% of all real estate deals were cash. The chart shows the most cash transactions in 2022 since 1988. In February, Bloomberg reported that all cash deals are above 50% in 13 cities, including Atlanta. The National Association of Home Builders posted the following on their website.

The chart shows cash purchases are increasing. FHA loans are decreasing rapidly. The chart below explains these movements. The average price for cash deals is significantly lower than the national average of a financed home (except for VA loans for veterans). FHA loan demand has been the weakest since 2007, which may explain the new policy. The government insures FHA loans, usually the most affordable option for first-time home buyers. Until 2021, it made up about 40% of monthly transactions. In 2022, first-time home buyers made up about 26% of the market. There is a ripple growing in the middle of the real estate market that could become a tsunami when it lands. 

The government knows the reality of the numbers, and they should scare you. In 2008, one of the primary issues was the lack of liquidity in the mortgage-backed securities (MBS) market. Since 1934, the law has required the Federal Reserve to hold a debt instrument for every dollar it creates. In response to the pandemic, the Federal Reserve balance sheet increased by $trillions, with 30% of all those dollars backed by MBS. The Fed is letting the MBS mature because if they sell, they will take a loss due to higher interest rates. There isn't any liquidity in the MBS market, so the Fed needs people to pay their mortgages and the mortgage industry to remain strong. As more of the market moves toward cash or creative financing options, the MBS market will have even less liquidity. One hiccup could quickly become a world-changing kaboom.

The government wants to make mortgages sustainable and equitable. It believes more fiscally responsible individuals should pay more than a higher default-risk individual to make mortgages available. Whatever the government calls it, it is wealth redistribution and rewards bad behavior. The government's plan has an extremely low likelihood of success. My opinion is that it adds significant and unnecessary risk to the already shaking housing market. This program is a shot across the bow about where plans for wealth redistribution are headed in the future. If the government can see it, like your credit score or ability to make a down payment, they will try to find a way to tax it. 

An invisible target is difficult to hit. Did you know precious metals transactions at the U.S. Gold Bureau are private? Just saying.

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