A case study on the news and the narrative regarding the new mortgage interest pricing.

[dnewton3]

The reality is that certain groups are getting a discount at the cost of other groups. Also, some groups will be unaffected.

I can easily summarize this:
* High-risk folks (with lower credit scores) will always pay higher interest rates. It's just that now they won't be paying as high a rate as what they did before the change.
* Low-risk folks (with good credit scores) will always have lower interest rates. It's just that now they will be paying slightly higher rates than before.

Where before a high-risk person may get a 6% rate, they would now get 5.25% or something like that. It's a discount.
Versus a low-risk person might have got a 4% rate, but now would pay a 4.5% rate or such. It's a rate increase.
(the rates are just examples, but you get the idea ...)


No one is claiming that the rates will invert, but there is MOST CERTAINLY a displacement of interest bearing load from the high-risk to low-risk groups. The bottom line is that the hysteria actually has a factual basis; that of making lower-risk folks pay for higher-risk folks. This article above only tries to mute the hysteria, not change the facts.

 

[BMWTurboDzl]

The reality is that certain groups are getting a discount at the cost of other groups. Also, some groups will be unaffected.

I can easily summarize this:
* High-risk folks (with lower credit scores) will always pay higher interest rates. It's just that now they won't be paying as high a rate as what they did before the change.
* Low-risk folks (with good credit scores) will always have lower interest rates. It's just that now they will be paying slightly higher rates than before.

Where before a high-risk person may get a 6% rate, they would now get 5.25% or something like that. It's a discount.
Versus a low-risk person might have got a 4% rate, but now would pay a 4.5% rate or such. It's a rate increase.
(the rates are just examples, but you get the idea ...)


No one is claiming that the rates will invert, but there is MOST CERTAINLY a displacement of interest bearing load from the high-risk to low-risk groups. The bottom line is that the hysteria actually has a factual basis; that of making lower-risk folks pay for higher-risk folks. This article above only tries to mute the hysteria, not change the facts.

The problem with this line of think is that the pricing discount for these higher scores was going to drop regardless. This is mentioned in the article.

 

[wings&wheels]

What was the spin?

I'd say the header and first two paragraphs, but spin may be too strong a descriptor as this is, after all, an opinion piece. Maybe 'condescension' is better

The discount is dropping, but the application of the fees in question is disproportionate and a function of credit score. We can argue whether effectively penalizing higher scores makes sense as a matter or policy (I think it is ridiculous), but that is what was proposed.

 

[PimTac]

The reality is that certain groups are getting a discount at the cost of other groups. Also, some groups will be unaffected.

I can easily summarize this:
* High-risk folks (with lower credit scores) will always pay higher interest rates. It's just that now they won't be paying as high a rate as what they did before the change.
* Low-risk folks (with good credit scores) will always have lower interest rates. It's just that now they will be paying slightly higher rates than before.

Where before a high-risk person may get a 6% rate, they would now get 5.25% or something like that. It's a discount.
Versus a low-risk person might have got a 4% rate, but now would pay a 4.5% rate or such. It's a rate increase.
(the rates are just examples, but you get the idea ...)


No one is claiming that the rates will invert, but there is MOST CERTAINLY a displacement of interest bearing load from the high-risk to low-risk groups. The bottom line is that the hysteria actually has a factual basis; that of making lower-risk folks pay for higher-risk folks. This article above only tries to mute the hysteria, not change the facts.

My experience with these types of solutions is that they never stop. The rates for those with good credit scores will slowly increase over time.

 

[JeffKeryk]

The reality is that certain groups are getting a discount at the cost of other groups. Also, some groups will be unaffected.

I can easily summarize this:
* High-risk folks (with lower credit scores) will always pay higher interest rates. It's just that now they won't be paying as high a rate as what they did before the change.
* Low-risk folks (with good credit scores) will always have lower interest rates. It's just that now they will be paying slightly higher rates than before.

Where before a high-risk person may get a 6% rate, they would now get 5.25% or something like that. It's a discount.
Versus a low-risk person might have got a 4% rate, but now would pay a 4.5% rate or such. It's a rate increase.
(the rates are just examples, but you get the idea ...)


No one is claiming that the rates will invert, but there is MOST CERTAINLY a displacement of interest bearing load from the high-risk to low-risk groups. The bottom line is that the hysteria actually has a factual basis; that of making lower-risk folks pay for higher-risk folks. This article above only tries to mute the hysteria, not change the facts.

Not sure that's true. Respectfully, that's one way to look at it. Just because one group gets a bigger break on certain fees, how is that at the cost of other groups?
If the higher risk borrower is paying more for a loan than the low risk borrower, so you could also say the high risk borrower is subsidizing the low risk borrower.

Buying money is cheaper (and easier) for low risk borrowers; that's the bottom line.

 

[CKN]

Well there was also a time recently, as in 2009-2014 or so, where most of the young people who were 22-35 at the time, swore up and down they would NEVER EVER NEVER buy a house because of what happened in the years prior. They would never buy a house, they would always rent.


Well, that created a demand for rental property. You create a demand for anything and the price escalates to what the market bears. Lots of over-educated people hate that, mainly because they have chosen to be brainwashed by low-information/IQ individuals who have an agenda with regard to having a dumb general population.

That's far too simplistic. There have been a great many real estate partnerships who have snatched up properties in major cities in the U.S. Then you have many properties that would have been sold that and now Air BnB's. There are other factors as well. Do a little more research-google is your friend.

 

[wings&wheels]

Not sure that's true. Respectfully, that's one way to look at it. Just because one group gets a bigger break on certain fees, how is that at the cost of other groups?
If the higher risk borrower is paying more for a loan than the low risk borrower, you could also say the high risk borrower is subsidizing the low risk borrower.

Buying money is cheaper (and easier) for low risk borrowers; that's the bottom line.

But the higher cost for the higher risk borrowers is not a subsidy, it is, at least theoretically, driven by the higher risk and potential associated higher costs of lending to that pool; lost income due to past due payments (bank does not have use of the $ for the delinquency), increased service costs, collection through repossession and disposal, etc. The higher rates are effectively a hedge against potential future costs that, if not recognized, goes to the bottom line. Obviously, this is the pure business model, not reflecting social policy, etc.

 

[Quattro Pete]

people need to understand there's maintenance, taxes, repairs, etc. with either renting or buying.

Maybe it depends on the rental property, but I rented many times in the past, and there were never any taxes, maintenance, or repair costs associated with renting. It was all landlord's responsibility.

And on the contrary, in some places, if you own a home, your monthly property taxes, HOA fees, landscaping, snow removal, maintenance, and repair costs could easily be as much or more as monthly rent. And then you have the mortgage payment on top of it.

 

[Astro14]

A home is both. Paying rent makes sense for some and at different periods in one's life. I sold a home at a loss in the down market about 1994 and bought the worst home in Los Gatos, considered a good neighborhood. Well, this home is paid off and worth $2M. So yeah, no rent or payments. Just a nice peaceful place to live for peanuts. Having a home free and clear is an incredible feeling. I am one of the lucky ones, for sure...

Jeff, once again, your situation is different than that of many others. There are many times, when renting makes far more sense than owning.

For example, you’re military. You have just moved across the country, and you know that you’re only gonna be there for 2 1/2 to 3 years.

In that case, there is no way to be certain that the appreciation on a home is going to enough to make putting 20% down worth the risk.

You don’t know the neighborhoods, you don’t know what’s good, and there are, as you’ve experienced, down markets.

Getting a job that guarantees you live in one place for decades it’s a luxury that many people do not have.

I have rented many times in my life.

People often fail to consider that renting is actually a reasonable deal, you exchange money for a place to live. You do not have money at risk.

And when you are done renting, you are free to move, either to a house that you’ve had a chance to scope out, or back across the country because that’s where Uncle Sam is sending you.

 

[JeffKeryk]

But the higher cost for the higher risk borrowers is not a subsidy, it is, at least theoretically, driven by the higher risk and potential associated higher costs of lending to that pool; lost income due to past due payments (bank does not have use of the $ for the delinquency), increased service costs, collection through repossession and disposal, etc. The higher rates are effectively a hedge against potential future costs that, if not recognized, foes to the bottom line. Obviously, this is the pure business model, not reflecting social policy, etc.

Sure. But the point is, higher risk borrowers pay more for the same loan. Several posts have suggested low risk borrowers are being penalized, which can true is one respect, but perhaps not looking at the big picture. That's the numbers... That's all I am saying.

 

[JeffKeryk]

Jeff, once again, your situation is different than that of many others. There are many times, when renting makes far more sense than owning.

For example, you’re military. You have just moved across the country, and you know that you’re only gonna be there for 2 1/2 to 3 years.

In that case, there is no way to be certain that the appreciation on a home is going to enough to make putting 20% down worth the risk.

You don’t know the neighborhoods, you don’t know what’s good, and there are, as you’ve experienced, down markets.

Getting a job that guarantees you live in one place for decades it’s a luxury that many people do not have.

I have rented many times in my life.

People often fail to consider that renting is actually a reasonable deal, you exchange money for a place to live. You do not have money at risk.

And when you are done renting, you are free to move, either to a house that you’ve had a chance to scope out, or back across the country because that’s where Uncle Sam is sending you.

Sure. That's why I prefaced my post with, "Paying rent makes sense for some and at different periods in one's life."
I am working with my grand nieces regardiing your well taken points as we speak. I don't believe buying is the best scenario for them right now.
One needs to know what they are getting into, especially with a purchase as big (and important) as a home purchase.

But having a home free and clear, especailly when one's working days are over, a pretty good position to be in.

 

[SubieRubyRoo]

Yup. Living in a great place free and clear is pretty amazing. Not a care in the world. It takes a long time, persistance and a lot of work to get there, but if you are lucky enough to get there, it makes life simple.

Now all you have to do (along with your neighbors) is not elect people who spend with reckless abandon and drive up property taxes to the point they bust your budget.

The county seat where I live has been losing students at a rate of about 5% per year for the last 25 years, but somehow in 2019 they took out a $20M bond to renovate the high school. This resulted in an effective 15% increase in property taxes in a single move. That $20M would have been much better spent luring some good-paying manufacturers to build facilities in the county to help retain population, but idiocy prevailed.

 

[JeffKeryk]

Now all you have to do (along with your neighbors) is not elect people who spend with reckless abandon and drive up property taxes to the point they bust your budget.

The county seat where I live has been losing students at a rate of about 5% per year for the last 25 years, but somehow in 2019 they took out a $20M bond to renovate the high school. This resulted in an effective 15% increase in property taxes in a single move. That $20M would have been much better spent luring some good-paying manufacturers to build facilities in the county to help retain population, but idiocy prevailed.

Sure. You have to look at total recurring costs. My goal, for many years, was to minimize recurring costs. Not having rent or mortgage cuts monthly cash outlays down considerably. Long term planning... My father told me, if you die young your problems are over. What happens if you live a long time? Yes, he was a tight wad.

 

[SubieRubyRoo]

Sure. You have to look at total recurring costs. My goal, for many years, was to minimize recurring costs. Not having rent or mortgage cuts monthly cash outlays down considerably. Long term planning... My father told me, if you die young your problems are over. What happens if you live a long time? Yes, he was a tight wad.

My buddy’s a podiatrist who will be 53 this year. He gave my 14-yo son some great advice that likely fell on deaf ears, unfortunately. When my son commented on all of Doc’s “toys” he told him “it’s not how much money you make over your lifetime. It’s how much you save.”

 

[SC Maintenance]

Please tell me how this article in the original post isn't wrong?

This chart was on the FHA site 2 months ago. I found it there and its now in the OP's article. These numbers are spreads - meaning the difference between how much a group paid before, vs the proposed.

It very simply says that if you have crappy credit and don't put much down, you pay much less than before - red pen circled / green cells.

If you have good credit, and put something down - you pay much more than before - black pen circled / red cells

If you put 40% down - it probably doesn't matter much - whole chart on the right.

Spin it however you want - the chart below is math.

Everything else is politics?

 

[JeffKeryk]

My buddy’s a podiatrist who will be 53 this year. He gave my 14-yo son some great advice that likely fell on deaf ears, unfortunately. When my son commented on all of Doc’s “toys” he told him “it’s not how much money you make over your lifetime. It’s how much you save.”

From the 80's on, that parking lots where I worked were full of drop dead gorgeous German cars. I drove strippie Toyota pickups and Hondas. My house is paid off so now I can buy any car I want. A lot of those other people have pictures of their cars...

 

[Dave Hess]

A home is both. Paying rent makes sense for some and at different periods in one's life. I sold a home at a loss in the down market about 1994 and bought the worst home in Los Gatos, considered a good neighborhood. Well, this home is paid off and worth $2M. So yeah, no rent or payments. Just a nice peaceful place to live for peanuts. Having a home free and clear is an incredible feeling. I am one of the lucky ones, for sure...

Do you have a HOA in your Los Gatos neighborhood ?

 

[BMWTurboDzl]

Please tell me how this article in the original post isn't wrong?

This chart was on the FHA site 2 months ago. I found it there and its now in the OP's article. These numbers are spreads - meaning the difference between how much a group paid before, vs the proposed.

It very simply says that if you have crappy credit and don't put much down, you pay much less than before - red pen circled / green cells.

If you have good credit, and put something down - you pay much more than before - black pen circled / red cells

If you put 40% down - it probably doesn't matter much - whole chart on the right.

Spin it however you want - the chart below is math.

Everything else is politics?

View attachment 157731

Correct but as the article mentions the discount was going to drop regardless because the GSE's have to make more $$ in order to rebuild their capital base. In light of this information you can't say that some higher score borrowers are now subsidizing lower score borrowers.
If you drill down to the bottom of the article and look at the Final LLPA you can see that lower scores are still paying more than better scores.

What wasn't mentioned in the article is how few these "lower score" borrowers actually exist. Of loans delivered approx 3 percent of the portfolio is comprised of borrowers under 660. 65 percent of the portfolio consists of borrower with scores at/over 740 and 22 percent are between 700-739. So 82 percent of the deliveries are borrowers with above average credit. If a company has to, by gov decree, rebuild its capital base where is it going to look to do that? Is it going to look at the 3 percent of the portfolio or the 82 percent?

https://www.fanniemae.com/media/46911/display

 

[Dave Hess]

Maybe there will be a 50 year mortgage with zero cash down payment and tax credits to help people buy homes ?

 

[Rand]

Maybe there will be a 50 year mortgage with zero cash down payment and tax credits to help people buy homes ?

you forgot about the part of it all being prime real estate.