Higher_mortgage_fees
00:00:00.000 | Hello, everybody, it's Sam from Financial Samurai. And boy, there seems to be a lot going on in the
00:00:05.760 | banking sector in May 2023. First of all, First Republic Bank getting bought out by J.P. Morgan
00:00:13.680 | looks like a win for everybody. J.P. Morgan gets a nice discount. The FDIC doesn't have to ensure
00:00:22.000 | as many deposits. First Republic Bank employees hopefully get to keep their jobs.
00:00:29.440 | Customers of First Republic Bank have more peace of mind that their deposits will be OK and
00:00:35.200 | operations will continue. And then the whole banking system is starting to think, well,
00:00:40.560 | could this be a one-off event, isolated incident, as they say? And hopefully this will quell any
00:00:48.160 | further fears of a banking contagion. And with less fear, well, there will be more risk appetite
00:00:56.160 | for risk assets like stocks, real estate, and more. We should expect some integration pains
00:01:03.360 | or adjustments over the next three to six months. Also, I would think that management, top down to
00:01:10.080 | the mortgage officers and lenders, would say, look, please be careful about who you lend to.
00:01:16.160 | Be more stringent. Look for people with higher credit scores, better credit reports,
00:01:21.680 | who have longer borrowing histories, and so forth. Because we don't want to screw up this
00:01:26.000 | acquisition. We want to get this acquisition off to the right start. So maybe lending will be a
00:01:32.400 | little bit tighter over the next three to six months for where First Republic served. And it
00:01:38.400 | looks like, I think, in the first quarter of 2023, First Republic was involved in 30% to 40%
00:01:45.120 | of all residential transactions here in San Francisco. So that might impede the housing
00:01:52.400 | market here in San Francisco. We don't know for sure. I'm sure other banks will be aggressively
00:01:58.080 | trying to take business away from First Republic Bank and JP Morgan now. But it remains to be seen
00:02:04.400 | what will happen. But I continue to believe there is this window of opportunity, perhaps over the
00:02:09.840 | next three to six months to buy real estate at a discount. Because I think real estate is going to
00:02:15.440 | catch up to the stock market, since the stock market is up about eight and a half to 9% year
00:02:21.520 | to date. And it's up even more since the bottom in October 2022, when the S&P 500 was at 3577.
00:02:30.240 | Which brings me to the second point in this podcast. Higher credit scores now mean higher
00:02:36.320 | mortgage rates. The Federal Housing Finance Agency, or FHFA, has recalibrated the fee structure for
00:02:44.880 | loan level price adjustment by lowering fees for some borrowers and hiking fees for other borrowers.
00:02:52.640 | For example, before May 1, 2023, if you had a credit score of 740 or higher on a $500,000 loan,
00:03:02.080 | you would pay a 0.25% fee or $1,250. After May 1, 2023, you will pay as much as 0.375%
00:03:12.880 | or $1,875 on the same loan. Now, paying up to $625 more in fees seems significant, I guess.
00:03:24.720 | It's 50% more than what you would have paid before the FHFA changed the rules. But if you found that
00:03:31.280 | dream home for $500,000, I'm not sure that fee up to 0.375% would really negatively affect your
00:03:40.240 | decision to purchase. You're not going to say, "Wow, I'm going to walk away." You're going to
00:03:44.400 | find a way to either pay that fee or negotiate a discount from the seller or negotiate a commission
00:03:50.880 | concession from the listing agent or your own agent. In another example I saw, homebuyers with
00:03:58.720 | a credit score of 740 to 759, which is considered "very good" and putting 20% down will also face
00:04:06.880 | a new LLPA fee of 1% compared with just 0.5% previously. So that means the fee doubles from
00:04:17.040 | $2,500 to $5,000. Now, that seems kind of egregious. $2,500 more in fees. I've written
00:04:26.320 | and talked about how to minimize mortgage refinance and new mortgage fees before,
00:04:32.160 | and I'm going to list the posts in the show notes. But there are plenty of fees to pay.
00:04:37.600 | Application fee, commitment fee, appraisal fee, credit report fee, flood certification fee,
00:04:45.360 | tax services fee, title and escrow fees, that's important, recording fees, notary fees.
00:04:53.760 | And now, let's say there's this new line item for this extra fee. You don't really know. The fees
00:04:59.680 | are kind of opaque until they're not. They're listed on the fee schedule whenever you get a
00:05:05.280 | new mortgage or refinance a mortgage. So it's up to you as the borrower to ask what each individual
00:05:12.480 | fee is and to try to negotiate these fees down. Now, if you don't see an explicit increase in
00:05:20.400 | your fee, and it's hard to tell because you don't really have an idea of what the fee would have
00:05:25.120 | been before when you're doing the mortgage because you're not applying for a mortgage
00:05:29.840 | before May 1st and then after the legislation passed May 1st, right? You just have no kind of
00:05:36.480 | comparison. Given this opaqueness, your modus operandi is to always negotiate, negotiate,
00:05:45.200 | negotiate, negotiate. And if there's no higher fee, then you're going to have to pay a slightly
00:05:50.320 | higher mortgage rate because the lender has to make money somewhere somehow. Hence, don't be
00:05:56.800 | fooled by a "no-cost refinance." I like no-cost refinances because if you refinance and you don't
00:06:03.760 | have to pay anything out of pocket and the rate is lower than the rate you're paying now, then
00:06:07.840 | you're winning. You would be a fool not to refinance, right? But the no-cost refinance
00:06:13.600 | basically rolls up all those fees into a higher mortgage rate for the lender to earn a wider
00:06:20.560 | spread. So, for example, let's say you have a 740 credit score. Again, you might pay a 0.25% higher
00:06:28.000 | mortgage rate than someone with only a 660 credit score, which is considered good, believe it or
00:06:34.080 | not good, but it's not that good to get a 660 unless you're just graduating from high school
00:06:40.000 | or college and starting your credit journey. A 0.25% mortgage rate, in my experience, is very
00:06:46.000 | significant because in the past when mortgage rates were low, think about it, if it was only
00:06:52.800 | 2% mortgage rate, 0.25% is a greater percentage of 2% than 0.25% is of 6%, right? So in the past,
00:07:02.240 | 0.25% was very significant. And when I would shop around for a mortgage, which I always do,
00:07:08.000 | and I recommend everybody always do, 0.25% better rate or lower rate was the best that any
00:07:16.240 | competing bank could offer me. And sometimes I could only get 0.25% lower rate by transferring
00:07:24.960 | assets and doing relationship pricing, right? I remember transferring assets to Wells Fargo,
00:07:30.560 | a million dollars in assets. Basically, I just transferred a portion of my portfolio or one
00:07:35.600 | portfolio, and that was how they would give me a lower rate. But a million dollars is a lot of
00:07:42.000 | money and not that many people have a million dollars to transfer. So 0.25% spread is significant.
00:07:48.640 | Now, it would be one thing if everybody is getting squeezed with higher fees and higher
00:07:54.080 | mortgage rates, then getting squeezed is easier to take, right? You know, brothers and sisters in
00:07:59.040 | arms. However, the FHFA has also decided to lower the fees for people with lower credit scores.
00:08:05.280 | For example, starting May 1, 2023, a homebuyer with a credit score of between 640 to 659,
00:08:13.200 | and who has a down payment of only 5% will incur a loan level price adjustment fee of 1.5% down
00:08:21.120 | from 2.75%. That is pretty significant. If you're talking about a $500,000 house,
00:08:28.240 | that's like paying "only" $7,500 down from $13,750 previously. I mean, 2.75% sounds egregious in the
00:08:37.200 | first place, and I don't know who's exactly determining how do they come up with these
00:08:41.760 | fees. It seems a little bit arbitrary. But if you recall with the high credit score example,
00:08:47.280 | the fee could go up to, let's say, 1% or 0.375%. Nobody knows for sure. That's the amazing thing.
00:08:56.240 | But the top, the cap in the examples that I've seen was 1% for high credit score borrowers,
00:09:03.680 | right? And we're here talking about people with lower credit scores used to having to pay up to
00:09:09.600 | 2.75%. That's 1.75% higher than people with higher credit scores. So in one way, you can see this
00:09:19.040 | adjustment in fees more as parity. The lower credit score borrower is still paying 1.5%.
00:09:26.240 | But the higher credit score borrower is now paying 1%. It's still half a percent lower than
00:09:33.680 | the lower credit score borrower. It's just the gap isn't as wide. So that is one way to look at it.
00:09:40.960 | Another way to look at it is, oh, we're punishing high credit score responsible borrowers by
00:09:48.080 | charging them higher rates and subsidizing the lower credit score, less responsible borrowers,
00:09:54.560 | the riskier borrowers. And I can see this argument quite clearly. It's something that the media has
00:10:01.200 | talked about, has grabbed hold of. It's something that I felt initially, I was like, well,
00:10:06.800 | why do I have to pay a higher fee? If I've been responsible in my historical payments,
00:10:11.920 | I've always paid on time, I never took out too much debt. Why are you punishing me?
00:10:17.440 | I've been helpful. I've been paying my taxes. I've been a good borrower. I've never defaulted.
00:10:22.720 | I've never been late. This is a perverse incentive structure. And it is. But are you really going to
00:10:30.640 | tank your credit score to try to save on a fee? You don't know how much you're actually going to
00:10:35.760 | save? I don't think so. Nobody's going to risk tanking their credit score because you might get
00:10:41.680 | shut out completely from getting a mortgage or refinancing a mortgage. And I thought about this
00:10:48.080 | a lot as I was writing my post. And I stumbled upon a mortgage originations by credit score
00:10:55.520 | graph from the New York Fed Consumer Credit Panel and Equifax. And it has data since 2003,
00:11:03.680 | so 20 years of data. And what you see from this graph, which I highly recommend you check out
00:11:10.160 | in my post, is that starting around 2010, the majority of mortgage originations came from home
00:11:16.400 | buyers with 760 plus credit scores. It wasn't a huge majority. We're talking like maybe 55%.
00:11:23.680 | However, it was a majority. And then starting around the first quarter of 2020, those with 760
00:11:32.720 | plus credit scores, which is deemed as excellent, started to really dominate mortgage originations.
00:11:39.520 | Seriously dominate. We're talking 70 plus percent of all mortgages. And then if you add up those
00:11:45.360 | with 720 to 759 credit scores, that combination, 720 and above, that was like 80 plus percent,
00:11:54.640 | 80 to 90%. So in other words, those with the highest credit scores got the most mortgages.
00:12:01.920 | And what has happened since 2010? Well, there's been a huge bull run in the real estate market
00:12:08.160 | since 2010. And then I looked at the data since 2003 for folks with lower credit scores, for those
00:12:15.280 | with 660 and below. From 2003 to the financial crisis in 2008, the representation of folks with
00:12:24.800 | under a 660 credit score was decent, like 30% of mortgage originations. But after the global crisis
00:12:35.120 | in 2008, starting in 2010, their percentage representation dropped to under 15%. And if
00:12:45.520 | you look at folks with under a 660 credit score, it's like 5% of all mortgage originations. So in
00:12:53.040 | other words, those with under 660 credit score have gotten completely shut out of the housing
00:12:58.560 | market, boom, since 2003. There is currently about $45 trillion of US homeowner equity right now.
00:13:08.800 | It's surged tremendously over the past 30 years. And then mortgage debt outstanding has kind of
00:13:15.760 | held steady since 2008. So in other words, homeowners have gotten super wealthy. And the
00:13:23.120 | American government believes home ownership is one of the key paths to building more wealth for
00:13:29.440 | the average American. And so do I. I've been writing about this since 2009 when Financial
00:13:34.400 | Samurai started. You own your primary residence, you get neutral inflation. You ride the wave of
00:13:40.160 | inflation. And you don't get hurt by inflation by paying ever rising rents. And then to go long,
00:13:46.480 | real estate is to buy another property, because you got to live somewhere, right? You are short
00:13:51.680 | the real estate market if you're renting because you're a price taker. So if you've been a homeowner
00:13:56.080 | for the past 10, 20, 30 years, you should feel pretty good. You should feel wealthier, you should
00:14:02.960 | feel thankful that you didn't have to rent all those years, because you have so much home equity.
00:14:08.000 | So to be asked to pay a slightly higher fee, if you were to use some of your home equity to buy
00:14:14.720 | another house or your cash or cash flow, doesn't seem like that big of a deal. I know some of you
00:14:21.600 | will be like, well, that's I don't know Marxist thinking that's punishment of success and hard
00:14:26.560 | work and reward. But it's just not even close in terms of the people who've made money in real
00:14:32.880 | estate versus the people who've been renting over the past 30 years. We know from the data that the
00:14:38.480 | median net worth of a homeowner is 40 to 44 times greater than the median net worth of a renter.
00:14:45.120 | It's not four times, which is already a lot. It's 40 to 44 times. So in my mind, if I'm being forced
00:14:53.040 | to pay several thousand dollars more in mortgage fees or a higher mortgage rate to buy another
00:14:59.520 | house that I really honestly don't need, then I guess so be it. I've already been paying six
00:15:06.080 | figures a year in federal income taxes every single year for almost 20 years, I think.
00:15:12.240 | And half the US population, half the working US population doesn't pay any federal income taxes.
00:15:18.880 | And I guess someone has to pay these taxes, so it has to be me. It might as well be someone who's
00:15:24.560 | been able to make enough money to pay these taxes. And then as an Asian American person,
00:15:30.560 | I see the average SAT and ACT scores to get admitted into these colleges that seem much
00:15:37.760 | higher than every other race. And I've been used to seeing this for the past 20 plus years. And
00:15:43.200 | I'm thinking to myself, okay, well, I guess I just have to try harder to get higher grades and higher
00:15:49.760 | scores and higher extracurricular activities. Because I've just accepted this is the way the
00:15:54.880 | world is. I can complain about it with my friends. I can vote on politicians who are more aligned
00:16:01.840 | with my interests. And that's what we should all do, because we're all selfish for our own needs.
00:16:07.040 | And I can just accept it and do my best to focus on what I can control, which is my work ethic,
00:16:13.760 | and my desire to learn strategies to better my financial situation. I think we can all agree
00:16:21.120 | that that is kind of the best thing we can do. It's often the only thing we can do,
00:16:26.240 | because the government decides who wins and who fails. And the government is trying to make things
00:16:34.160 | more equitable. In this case, it's the name of equitable access to home ownership. Because once
00:16:41.120 | again, home ownership is one of the easiest ways for the average American to build wealth over
00:16:47.040 | time, over generations. We all know the power of compound interest and time. 10, 20, 30, 40
00:16:55.280 | generations of time builds humongous wealth. We can all put our net worth into a compound interest
00:17:02.400 | calculator and change some variables in terms of returns and time. And we'll all be amazed when
00:17:08.080 | people gave me a lot of grief about saving or expecting college to cost $750,000 all year in
00:17:14.720 | four years. Come back to me in 15 years and let me know whether my assumptions today in 2023 were
00:17:22.560 | wrong. Because I will bet anybody that they will be closer to right than wrong. And if you don't
00:17:29.040 | save and plan for the future, well, you're going to be shocked in the future. And it just goes both
00:17:34.480 | ways. If you invest 15 years at a 5.5% rate of return, you're $350,000 today, it'll grow to $750,000.
00:17:42.160 | The math doesn't lie. So in conclusion, after much thought, after writing this post, I don't see
00:17:49.120 | paying higher fees for higher credit score borrowers as punishment, more as parity to the fee
00:17:56.800 | that higher credit score and lower credit score borrowers have to pay. Again, we're going down
00:18:03.120 | from 2.75% fee to 1.5% for lower credit score borrowers. And then from 0.5% to 1% fee for higher
00:18:13.440 | credit score borrowers. There's still a difference, folks. It's just that it's not as egregious.
00:18:18.240 | And there's one final thing to think about. It is expensive being poor from a lending point of view.
00:18:26.880 | Let's say you have a bad credit score and you're poor. So you are forced to pay a higher interest
00:18:33.680 | rate. Let's say it's 20% on your credit card. I never recommend anybody have revolving credit
00:18:39.360 | card debt. But let's say it's 20%. Whereas let's say you're rich and you have a great credit score.
00:18:44.800 | You only have to pay 7%, for example, because this is credit card. As a result, you're in like a
00:18:51.840 | catch 22. You're in a negative cycle here. Because you're poor, you have to pay a higher rate. And
00:18:57.040 | because you pay a higher rate, you stay poor. It's hard to get out of that negative poverty cycle.
00:19:03.760 | So if the government wants to give a slight discount for those with lower credit scores,
00:19:09.120 | then I think that's great for them. That helps them save money. The lenders are still going to
00:19:15.760 | go through their stringent lending standard to make sure that they can get paid back because
00:19:20.240 | they're capitalists too. They want to make a profit. So they're not going to just lend money
00:19:26.000 | to anybody with a terrible credit score or a mediocre credit score. No, they're going to go
00:19:31.920 | through their same underwriting process. All right, I've said enough about this topic. I'd love to hear
00:19:38.080 | your thoughts on whether this is fair, whether there are better ways to help more people get
00:19:45.280 | ahead financially. At Financial Samurai, I write everything and I talk about this podcast for free.
00:19:51.280 | I'm not charging anybody any money because I want more people to achieve financial freedom sooner
00:19:56.080 | rather than later. Real estate is very important to our family. It accounts for about 50% of our
00:20:01.920 | passive investment income, which enables both my wife and I to live more free. And I want that for
00:20:08.000 | all of you. I really do. Think about the positives. If more people can own homes, there might be
00:20:15.120 | less crime, less violence, less strain on the government to support poor people who are
00:20:23.520 | struggling. Yes, I know that I might sound like an idealist or a super optimist, but that's just who
00:20:30.640 | I am. Personally, I welcome the challenge to earn more, to increase my credit score, to pay down
00:20:36.400 | more debt and work harder to take care of my family. I'll teach these lessons to my children
00:20:42.400 | as well. And I hope you will too. Trying harder and being financially responsible tends to pay
00:20:48.880 | off in the long run. Thanks so much, everyone. If you enjoyed this podcast, I'd love a positive
00:20:53.680 | review. Leave a comment to share your thoughts. If you'd like to support my work, check out
00:20:58.320 | financialsamurai.com/btnt for my Wall Street Journal bestseller, Buy This, Not That. If you're
00:21:04.960 | looking to negotiate a severance and be free, it was my number one catalyst to leave my job in 2012.
00:21:11.760 | Check out How to Engineer Your Layoff at financialsamurai.com/hteyl. Take care.