Hello, everybody, it's Sam from Financial Samurai. And boy, there seems to be a lot going on in the banking sector in May 2023. First of all, First Republic Bank getting bought out by J.P. Morgan looks like a win for everybody. J.P. Morgan gets a nice discount. The FDIC doesn't have to ensure as many deposits.

First Republic Bank employees hopefully get to keep their jobs. Customers of First Republic Bank have more peace of mind that their deposits will be OK and operations will continue. And then the whole banking system is starting to think, well, could this be a one-off event, isolated incident, as they say?

And hopefully this will quell any further fears of a banking contagion. And with less fear, well, there will be more risk appetite for risk assets like stocks, real estate, and more. We should expect some integration pains or adjustments over the next three to six months. Also, I would think that management, top down to the mortgage officers and lenders, would say, look, please be careful about who you lend to.

Be more stringent. Look for people with higher credit scores, better credit reports, who have longer borrowing histories, and so forth. Because we don't want to screw up this acquisition. We want to get this acquisition off to the right start. So maybe lending will be a little bit tighter over the next three to six months for where First Republic served.

And it looks like, I think, in the first quarter of 2023, First Republic was involved in 30% to 40% of all residential transactions here in San Francisco. So that might impede the housing market here in San Francisco. We don't know for sure. I'm sure other banks will be aggressively trying to take business away from First Republic Bank and JP Morgan now.

But it remains to be seen what will happen. But I continue to believe there is this window of opportunity, perhaps over the next three to six months to buy real estate at a discount. Because I think real estate is going to catch up to the stock market, since the stock market is up about eight and a half to 9% year to date.

And it's up even more since the bottom in October 2022, when the S&P 500 was at 3577. Which brings me to the second point in this podcast. Higher credit scores now mean higher mortgage rates. The Federal Housing Finance Agency, or FHFA, has recalibrated the fee structure for loan level price adjustment by lowering fees for some borrowers and hiking fees for other borrowers.

For example, before May 1, 2023, if you had a credit score of 740 or higher on a $500,000 loan, you would pay a 0.25% fee or $1,250. After May 1, 2023, you will pay as much as 0.375% or $1,875 on the same loan. Now, paying up to $625 more in fees seems significant, I guess.

It's 50% more than what you would have paid before the FHFA changed the rules. But if you found that dream home for $500,000, I'm not sure that fee up to 0.375% would really negatively affect your decision to purchase. You're not going to say, "Wow, I'm going to walk away." You're going to find a way to either pay that fee or negotiate a discount from the seller or negotiate a commission concession from the listing agent or your own agent.

In another example I saw, homebuyers with a credit score of 740 to 759, which is considered "very good" and putting 20% down will also face a new LLPA fee of 1% compared with just 0.5% previously. So that means the fee doubles from $2,500 to $5,000. Now, that seems kind of egregious.

$2,500 more in fees. I've written and talked about how to minimize mortgage refinance and new mortgage fees before, and I'm going to list the posts in the show notes. But there are plenty of fees to pay. Application fee, commitment fee, appraisal fee, credit report fee, flood certification fee, tax services fee, title and escrow fees, that's important, recording fees, notary fees.

And now, let's say there's this new line item for this extra fee. You don't really know. The fees are kind of opaque until they're not. They're listed on the fee schedule whenever you get a new mortgage or refinance a mortgage. So it's up to you as the borrower to ask what each individual fee is and to try to negotiate these fees down.

Now, if you don't see an explicit increase in your fee, and it's hard to tell because you don't really have an idea of what the fee would have been before when you're doing the mortgage because you're not applying for a mortgage before May 1st and then after the legislation passed May 1st, right?

You just have no kind of comparison. Given this opaqueness, your modus operandi is to always negotiate, negotiate, negotiate, negotiate. And if there's no higher fee, then you're going to have to pay a slightly higher mortgage rate because the lender has to make money somewhere somehow. Hence, don't be fooled by a "no-cost refinance." I like no-cost refinances because if you refinance and you don't have to pay anything out of pocket and the rate is lower than the rate you're paying now, then you're winning.

You would be a fool not to refinance, right? But the no-cost refinance basically rolls up all those fees into a higher mortgage rate for the lender to earn a wider spread. So, for example, let's say you have a 740 credit score. Again, you might pay a 0.25% higher mortgage rate than someone with only a 660 credit score, which is considered good, believe it or not good, but it's not that good to get a 660 unless you're just graduating from high school or college and starting your credit journey.

A 0.25% mortgage rate, in my experience, is very significant because in the past when mortgage rates were low, think about it, if it was only 2% mortgage rate, 0.25% is a greater percentage of 2% than 0.25% is of 6%, right? So in the past, 0.25% was very significant. And when I would shop around for a mortgage, which I always do, and I recommend everybody always do, 0.25% better rate or lower rate was the best that any competing bank could offer me.

And sometimes I could only get 0.25% lower rate by transferring assets and doing relationship pricing, right? I remember transferring assets to Wells Fargo, a million dollars in assets. Basically, I just transferred a portion of my portfolio or one portfolio, and that was how they would give me a lower rate.

But a million dollars is a lot of money and not that many people have a million dollars to transfer. So 0.25% spread is significant. Now, it would be one thing if everybody is getting squeezed with higher fees and higher mortgage rates, then getting squeezed is easier to take, right?

You know, brothers and sisters in arms. However, the FHFA has also decided to lower the fees for people with lower credit scores. For example, starting May 1, 2023, a homebuyer with a credit score of between 640 to 659, and who has a down payment of only 5% will incur a loan level price adjustment fee of 1.5% down from 2.75%.

That is pretty significant. If you're talking about a $500,000 house, that's like paying "only" $7,500 down from $13,750 previously. I mean, 2.75% sounds egregious in the first place, and I don't know who's exactly determining how do they come up with these fees. It seems a little bit arbitrary. But if you recall with the high credit score example, the fee could go up to, let's say, 1% or 0.375%.

Nobody knows for sure. That's the amazing thing. But the top, the cap in the examples that I've seen was 1% for high credit score borrowers, right? And we're here talking about people with lower credit scores used to having to pay up to 2.75%. That's 1.75% higher than people with higher credit scores.

So in one way, you can see this adjustment in fees more as parity. The lower credit score borrower is still paying 1.5%. But the higher credit score borrower is now paying 1%. It's still half a percent lower than the lower credit score borrower. It's just the gap isn't as wide.

So that is one way to look at it. Another way to look at it is, oh, we're punishing high credit score responsible borrowers by charging them higher rates and subsidizing the lower credit score, less responsible borrowers, the riskier borrowers. And I can see this argument quite clearly. It's something that the media has talked about, has grabbed hold of.

It's something that I felt initially, I was like, well, why do I have to pay a higher fee? If I've been responsible in my historical payments, I've always paid on time, I never took out too much debt. Why are you punishing me? I've been helpful. I've been paying my taxes.

I've been a good borrower. I've never defaulted. I've never been late. This is a perverse incentive structure. And it is. But are you really going to tank your credit score to try to save on a fee? You don't know how much you're actually going to save? I don't think so.

Nobody's going to risk tanking their credit score because you might get shut out completely from getting a mortgage or refinancing a mortgage. And I thought about this a lot as I was writing my post. And I stumbled upon a mortgage originations by credit score graph from the New York Fed Consumer Credit Panel and Equifax.

And it has data since 2003, so 20 years of data. And what you see from this graph, which I highly recommend you check out in my post, is that starting around 2010, the majority of mortgage originations came from home buyers with 760 plus credit scores. It wasn't a huge majority.

We're talking like maybe 55%. However, it was a majority. And then starting around the first quarter of 2020, those with 760 plus credit scores, which is deemed as excellent, started to really dominate mortgage originations. Seriously dominate. We're talking 70 plus percent of all mortgages. And then if you add up those with 720 to 759 credit scores, that combination, 720 and above, that was like 80 plus percent, 80 to 90%.

So in other words, those with the highest credit scores got the most mortgages. And what has happened since 2010? Well, there's been a huge bull run in the real estate market since 2010. And then I looked at the data since 2003 for folks with lower credit scores, for those with 660 and below.

From 2003 to the financial crisis in 2008, the representation of folks with under a 660 credit score was decent, like 30% of mortgage originations. But after the global crisis in 2008, starting in 2010, their percentage representation dropped to under 15%. And if you look at folks with under a 660 credit score, it's like 5% of all mortgage originations.

So in other words, those with under 660 credit score have gotten completely shut out of the housing market, boom, since 2003. There is currently about $45 trillion of US homeowner equity right now. It's surged tremendously over the past 30 years. And then mortgage debt outstanding has kind of held steady since 2008.

So in other words, homeowners have gotten super wealthy. And the American government believes home ownership is one of the key paths to building more wealth for the average American. And so do I. I've been writing about this since 2009 when Financial Samurai started. You own your primary residence, you get neutral inflation.

You ride the wave of inflation. And you don't get hurt by inflation by paying ever rising rents. And then to go long, real estate is to buy another property, because you got to live somewhere, right? You are short the real estate market if you're renting because you're a price taker.

So if you've been a homeowner for the past 10, 20, 30 years, you should feel pretty good. You should feel wealthier, you should feel thankful that you didn't have to rent all those years, because you have so much home equity. So to be asked to pay a slightly higher fee, if you were to use some of your home equity to buy another house or your cash or cash flow, doesn't seem like that big of a deal.

I know some of you will be like, well, that's I don't know Marxist thinking that's punishment of success and hard work and reward. But it's just not even close in terms of the people who've made money in real estate versus the people who've been renting over the past 30 years.

We know from the data that the median net worth of a homeowner is 40 to 44 times greater than the median net worth of a renter. 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 to pay several thousand dollars more in mortgage fees or a higher mortgage rate to buy another house that I really honestly don't need, then I guess so be it.

I've already been paying six figures a year in federal income taxes every single year for almost 20 years, I think. And half the US population, half the working US population doesn't pay any federal income taxes. And I guess someone has to pay these taxes, so it has to be me.

It might as well be someone who's been able to make enough money to pay these taxes. And then as an Asian American person, I see the average SAT and ACT scores to get admitted into these colleges that seem much higher than every other race. And I've been used to seeing this for the past 20 plus years.

And I'm thinking to myself, okay, well, I guess I just have to try harder to get higher grades and higher scores and higher extracurricular activities. Because I've just accepted this is the way the world is. I can complain about it with my friends. I can vote on politicians who are more aligned with my interests.

And that's what we should all do, because we're all selfish for our own needs. And I can just accept it and do my best to focus on what I can control, which is my work ethic, and my desire to learn strategies to better my financial situation. I think we can all agree that that is kind of the best thing we can do.

It's often the only thing we can do, because the government decides who wins and who fails. And the government is trying to make things more equitable. In this case, it's the name of equitable access to home ownership. Because once again, home ownership is one of the easiest ways for the average American to build wealth over time, over generations.

We all know the power of compound interest and time. 10, 20, 30, 40 generations of time builds humongous wealth. We can all put our net worth into a compound interest calculator and change some variables in terms of returns and time. And we'll all be amazed when people gave me a lot of grief about saving or expecting college to cost $750,000 all year in four years.

Come back to me in 15 years and let me know whether my assumptions today in 2023 were wrong. Because I will bet anybody that they will be closer to right than wrong. And if you don't save and plan for the future, well, you're going to be shocked in the future.

And it just goes both ways. If you invest 15 years at a 5.5% rate of return, you're $350,000 today, it'll grow to $750,000. The math doesn't lie. So in conclusion, after much thought, after writing this post, I don't see paying higher fees for higher credit score borrowers as punishment, more as parity to the fee that higher credit score and lower credit score borrowers have to pay.

Again, we're going down from 2.75% fee to 1.5% for lower credit score borrowers. And then from 0.5% to 1% fee for higher credit score borrowers. There's still a difference, folks. It's just that it's not as egregious. And there's one final thing to think about. It is expensive being poor from a lending point of view.

Let's say you have a bad credit score and you're poor. So you are forced to pay a higher interest rate. Let's say it's 20% on your credit card. I never recommend anybody have revolving credit card debt. But let's say it's 20%. Whereas let's say you're rich and you have a great credit score.

You only have to pay 7%, for example, because this is credit card. As a result, you're in like a catch 22. You're in a negative cycle here. Because you're poor, you have to pay a higher rate. And because you pay a higher rate, you stay poor. It's hard to get out of that negative poverty cycle.

So if the government wants to give a slight discount for those with lower credit scores, then I think that's great for them. That helps them save money. The lenders are still going to go through their stringent lending standard to make sure that they can get paid back because they're capitalists too.

They want to make a profit. So they're not going to just lend money to anybody with a terrible credit score or a mediocre credit score. No, they're going to go through their same underwriting process. All right, I've said enough about this topic. I'd love to hear your thoughts on whether this is fair, whether there are better ways to help more people get ahead financially.

At Financial Samurai, I write everything and I talk about this podcast for free. I'm not charging anybody any money because I want more people to achieve financial freedom sooner rather than later. Real estate is very important to our family. It accounts for about 50% of our passive investment income, which enables both my wife and I to live more free.

And I want that for all of you. I really do. Think about the positives. If more people can own homes, there might be less crime, less violence, less strain on the government to support poor people who are struggling. Yes, I know that I might sound like an idealist or a super optimist, but that's just who I am.

Personally, I welcome the challenge to earn more, to increase my credit score, to pay down more debt and work harder to take care of my family. I'll teach these lessons to my children as well. And I hope you will too. Trying harder and being financially responsible tends to pay off in the long run.

Thanks so much, everyone. If you enjoyed this podcast, I'd love a positive review. Leave a comment to share your thoughts. If you'd like to support my work, check out financialsamurai.com/btnt for my Wall Street Journal bestseller, Buy This, Not That. If you're looking to negotiate a severance and be free, it was my number one catalyst to leave my job in 2012.

Check out How to Engineer Your Layoff at financialsamurai.com/hteyl. Take care.