Are Good-Credit Buyers Really Paying More? The 2023 Mortgage Fee Change, Explained

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Three topics, one show

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom. It's Wednesday, May 3rd, and we have a lot going on. The Fed just announced another rate hike, so we'll talk about that. We've had huge articles going around about the government changing things so that someone with a high credit score and a big down payment gets a higher rate while someone with lower credit and a lower down payment gets a better one — good-credit borrowers subsidizing lower-credit borrowers. And we've got rentals, because trying to get into one right now is pretty crazy. All three are important and all three have been big news — I was getting text messages with the Biden articles over and over while I was at Stagecoach.

Also, meet Buck. He's our new puppy — Buck Shot — and he's a bit of a troublemaker. We lost our cocker spaniel of 14 years; she came to work with me every day, and my car was empty and lonely. Buck's a springer spaniel, a little bigger, because our Newfoundland at home is about 150 pounds and used to trample the cocker.

The Fed raised — and rates barely moved

First thing: the Federal Reserve raised interest rates a quarter of a point. It was anticipated, it wasn't a surprise, and it didn't really rock the markets. What will move the market is what people anticipate for the next meeting.

Here's the mechanism, in layman's terms. Mortgage rates aren't directly connected to the Fed funds rate. Short-term debt is — home equity lines, credit cards, anything adjustable, car loans. Mortgages are tied to mortgage-backed securities and bond yields, and they behave more like the stock market: a big announcement comes out, the stock market rallies, and mortgage rates get worse with it. When the stock market struggles, mortgage rates get better.

Why? Say you have money to place. When the stock market is on fire, the big investors put it into stocks. When things get iffy and stocks start dropping, they move it into longer-term securities that hold value — mortgage-backed securities, 30-year notes. That kind of instrument won't make what a hot stock market makes, but it's slow and secure. So when stocks do great, rates go up; when stocks don't, rates come down. It's money moving back and forth.

And everyone is anticipating. Investors are trying to guess what the next Fed statement does to stocks so they know whether to move money now. Banks are trying to decide whether to crank rates up early and get it out of the way, or wait. Everybody is working on anticipation, not knowledge.

Which is why the rates we have right now are probably the best we've had in about three months. I believe we've peaked for now. Two or three months from now, who knows — there could be another financial event that changes everything. But based on today, I think rates hit their peak and came down a bit, because everyone had already built that quarter point in. So even with the Fed saying they're raising, our rate sheets are in good shape.

If you have a home equity line of credit or credit card debt, though, you will see it. Your minimum payments go up and you'll pay more interest. That's immediate.

The other thing I took from today's meeting: the vote was unanimous. Watching the press conference, Powell was very elusive — there was no “we're done” and no “we're going again.” It's 50-50 right now. Six weeks ago I said I thought we were in for two more raises, one today and one after. Whether the second happens, I don't know.

And notice the paradox in how that plays out. If everyone anticipates another quarter point and decides stocks will be volatile, money moves to safety and mortgage rates could actually get better. If the Fed instead announces a hold, you get a stock market rally and rates go up a bit. It's all about anticipation and timing.

The Fed's own statement

I want to read you the FOMC statement itself so you're getting the real thing rather than someone's interpretation. It was released at 2 p.m. Eastern — 11 a.m. my time.

“Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation; the extent of these effects remains uncertain. The committee remains highly attentive to inflation risks.

The committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the committee decided to raise the target range for the federal funds rate to 5 to 5.25%. The committee will closely monitor incoming information and assess the implications for monetary policy in determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time. The committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

In addition, the committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities as described in its previously announced plans. The committee is strongly committed to returning inflation to its 2% objective. In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook. The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee's goals.”

At the end of the day, that's what I opened the show with: they're not telling us anything. Things look stable.

Powell did say during the press conference that they're not looking at this point like we're jumping into any massive recession — they still feel the chances of a soft landing are there. Job openings are still plentiful. Starting wages, which had been pushed very high because inflation was high, have come down a little. That's the point of bringing inflation down: when everything costs more you need to earn more to survive, so the two come down together.

One question asked was whether they still expect to start cutting rates by the end of this year, as many were anticipating. His answer was that this is going to be a very long project. My read as the Mortgage Mom: we probably don't see cuts by the end of this year. Do I think we'll see cuts? Absolutely, it has to happen. My best guess is they start toward the end of the first quarter of 2024, and I've been saying that all year.

Did the government just penalize good credit?

Now the article everyone has been sending me: President Biden is going to subsidize lower credit scores and lower down payments by making people with good credit and big down payments pay more in their rates.

Headlines are headlines. News is news. Media is always looking for a story. Is it true? Yes — but let me read you what our secondary markets contact sent out, because it explains what actually happened. This went out Monday morning. I'm not political, and neither is the Mortgage Mom — I miss the days when religion and politics were the two things you avoided with your neighbors.

“I always know something is up when my neighbor, who knows I work in the mortgage industry, asks me: can you believe what Joe Biden is doing to high credit home buyers? With the news cycles always scouring for content, anything is relevant these days, even press releases from usually boring housing agencies. The last couple of weeks, the FHFA raising fees for borrowers with good credit to subsidize lower-credit borrowers has been an actual storyline — except this was announced back at the beginning of the year and has been active in our pricing since February. It is somewhat confusing since May 1st was the day that all Fannie Mae securities could no longer contain loans with the old adjusters, but make no mistake: this is old news, and it barely made a blip in our overall pricing the past couple of months. There is not another new round of price adjustments. However, this morning Republican lawmakers introduced two bills to roll the adjustments back, so stay tuned.

A sliver of truth does exist in the headline. Yes, borrowers with FICOs between 680 and 779 suffered the largest negative price adjustment, with a couple of buckets getting up to three-quarters percent worse.”

Now — that is not three-quarters of a percent in interest rate. That's 0.75 in pricing, which is very different. Three-quarters in pricing is about 0.125 in rate. So your rate went up an eighth of a percent. If you were at 5%, you might now be at 5.125%. A minimal impact. It did impact, and they are trying to subsidize, but it isn't new — it's been in effect for months.

And some high-credit buckets got better. If your FICO is over 780 and your loan-to-value is 60 to 80% — so 20% to 40% down, or that much equity on a refinance — your pricing actually improved. Investment properties below 60% loan-to-value, meaning more than 40% equity, saw a significant improvement.

So let's put that one to bed. Don't let it ruffle your feathers. If you locked a rate any time since February, you've already felt it, and it was so minimal nobody noticed.

The housing data is turning up

Here's the part renters need to hear, because a lot of you have put things on hold.

“New home sales soared in March. Housing continues to show positive signs lately thanks to a decline in mortgage rates. New home sales for March grew by 9.6% when the markets expected a 1.6% decline.” I've been telling you for months: get in front of the herd, get pre-approved, get ready. There it is.

“The sales price remains 3.4% lower than in March 2022, but the improvement we are seeing since the beginning of the year highlights the strong demand for housing coupled with interest rate sensitivity. The Northeast saw the largest pickup in sales; warm weather could have helped fuel the buying activity. Builders also used incentives and buydowns to close deals.” That's something I've said before — if you don't like the rate today, negotiate. Get the seller to help with a closing cost credit and buy that rate down.

“Home prices rise for the first time in eight months. The S&P CoreLogic Case-Shiller national home price index rose month over month in February, breaking a string of seven consecutive months of declines.” The Federal Housing Finance Agency also reported a price rise for February. What's sparking it in an otherwise slower market? Low inventory and a decline in home loan rates since the peak in October.

People ran into a glass wall they didn't know was there — we moved five percentage points in 14 months, which would shock anybody. It brought everyone to a halt. Now people are realizing you can't put your life on hold forever, and coupled with how hard it is to get a rental, things are picking up again.

From another source — a different company, same data, which is why I trust it: “We all continue to hear conflicting information about home sales and prices in different parts of the nation and at different price points. One thing remains constant: there are over 50 million people aged 28 to 38. Millions do not own homes yet. Sure, some of them don't want to own, but millions do. There are currently only 562,000 active listings of houses for sale in the U.S. The supply-demand imbalance helps home prices.”

Zonda did a survey of why people decided to buy a home. The top reasons, which every loan officer should use in conversations: building my own equity rather than someone else's; marriage or having kids; stability; participating in home price appreciation; and it was cheaper to own than rent.

The median home price cited was $449,800, up about 3% compared to a year ago — and remember that's across the nation, so if you're in LA or Orange County that is not your average. Case-Shiller reported a 0.2% month-over-month gain in February and a 2% annual increase.

I hope you heard those two numbers: 50 million people between 28 and 38 who don't own homes, and 562,000 active listings across the country. Even if we have a recession, in my opinion prices don't take a massive plunge like the last one. What happens in a recession is that rates come down — so if you buy today, you get the chance to refinance to a lower payment, and you captured the appreciation in the meantime.

What it takes to get a rental right now

If you rent, you have no control over your landlord deciding not to renew because they're selling. You can't make improvements. You can't change things for your lifestyle. You're making your landlord wealthier, not yourself.

Here's what's happening. A good friend of mine just bought a condominium and decided to rent it out. She listed it on the MLS and got about eight agent calls. A girlfriend told her to put it on Facebook Marketplace — that's where everybody looks for rentals now. She's not even a Facebook person, but she tried it, and within two hours she had over 3,000 views. She couldn't respond to everyone, so she opened the property for one hour on one day.

She had a line out the door and down the street. Applications poured in. People offered more than she'd asked in rent. People offered to pay an entire year up front just to secure it. She had her pick of the crop on credit and income — she could ask for income documentation, which is exactly what you'd provide for a mortgage, and pull credit reports.

And here's my point: if you have enough money in your account to offer someone twelve months of rent in advance, you might want to think about a down payment on a house.

What she did get was $10,900 for a $3,000-a-month rental — first month, last month, security deposit and a pet deposit. The tenant had a 790 credit score, fully documented income, a stable job, W-2s and pay stubs. That girl could have purchased a property. With $10,900 you can buy a home — an FHA loan, down payment assistance. Her credit was fabulous and her income was fabulous. There was no reason for her to be renting. I'll have my friend on the show next week to tell you the whole story herself.

I have another friend, self-employed, recently divorced, who genuinely isn't ready to buy yet — maybe another 12 months — and I get that; many people are in that spot. She found a place she loved in Valencia, out toward LA County. Same situation: the showing was a zoo, she put in an application, offered money up front, offered more than they'd asked. And that's across California, and I wouldn't be surprised if it's national.

Renting right now is very, very difficult. But if you can be one of the lucky few who get chosen to rent, your chances of qualifying for a mortgage are very high. So why continue to subsidize somebody else? Three thousand a month times 12 months is gone. No mortgage interest deduction, no property tax deduction, no stability, and they can raise the rent next year — instead of a 30-year fixed payment that stays the same.

Recessions don't automatically mean falling home prices

Look it up: home prices don't always crash during a recession. In most recessions, prices went up. It's the most recent one everybody remembers, and in that one prices did fall — because we didn't have the regulation in mortgage and real estate that we should have, and behavior was mismanaged. That was the cause.

This time, everyone who owns a home today qualified for it, and the majority got in when rates were very low. If they own rentals, they're not selling. If they own a home, they're staying, because moving costs more. Rates will come down eventually — the Fed will get inflation where it wants it and then cut — and that's your chance to refinance to a lower payment. It also brings a lot more buyers to the market.

The overbidding has already started. Heather, a real estate agent on my team, wrote an offer for one of our clients two days ago. The property was listed at $675,000. Everyone thinks homes are sitting right now — they're not. It sold for about $725,000: no contingencies, no credits, 14-day close. Month over month, February to March got better, March to April got better, and May is going to be better than April. There just isn't enough inventory, people see rates stabilizing, and they're coming out of the woodwork.

The mom moment

Now I'm going to be blunt, and some of you are going to hate me for it. My kids hate it when I do this.

Property values are high. We live in California because we want to be in California. I think about moving somewhere less expensive all the time — then I think about the heat in Arizona or Vegas, or the humidity in the Midwest, and I can't do it. California is expensive and it's only going to get more expensive. And all the people who exited California in droves are coming back, which is part of why you're having such a hard time finding a rental.

Here's the news. Most people come to me with the dream of home ownership, and in their mind a home is a three-bedroom, two-bathroom house. They're not going to buy a condo.

If you're out looking at apartments at $2,800, $3,000, $3,500 a month depending on the city — that's what you can afford to buy. Just not a house. A condo. You need a stepping stone.

Even the Mortgage Mom's first property was a one-bedroom, 580-square-foot condo. Then I bought a two-bedroom, 900-square-foot townhome — I got a garage and inside laundry. Then a three-bedroom, two-and-a-half-bath duplex, and I only owned one side of it. Then I bought my first house.

Just because you're going to buy doesn't mean you have to go buy the million-dollar three-bedroom. I'm sorry if that kills the dream, but the dream is the stepping stone. Get the condo, the two-bedroom two-bath you can afford for the payment you'd pay in rent. Then rent that bad boy out and buy the townhome. Then the duplex. Then the single-family home — and keep all of them as you go.

If you're looking at apartments, you should be looking at condos. If you're looking at a two-bedroom apartment, you should be looking at a two-bedroom condo. That's mom's checkmate of the day. Some of you will be mad at me. My kids are millennials; I'm Gen X. I'm used to it.

And think about what a landlord asks of you: first, last, a deposit, maybe a pet deposit, proof of income and decent credit. Buying a house is going to be more liberal on your credit report than a landlord is.

Wrap-up

We have plenty of down payment assistance, and Carrie on my team is excellent with it. The CalHFA Dream For All program may have gone away, but the standard CalHFA program is still there, along with other assistance programs, and if you're looking to move somewhere a bit more rural there's USDA. The opportunity is there.

Reach out and get yourself started, and stop making other people rich. To know when I go live, text the word MOM to 844-935-3634 — 844-WE-LEND-4 — or just call that number and talk to us. I'll be back next Wednesday. Talk to you all soon.