A New Policy Incentivizing Poor Financial Decisions

Last week the Biden administration implemented a new federal rule forcing home buyers (with good credit ratings) to pay higher fees to subsidize home buyers with poor credit ratings. This rule is set to take effect May 1st, just ahead of peak buying season.

High-credit consumers with scores ranging from 680 to above 780 will see a spike in mortgage costs with the biggest increases being felt by those who put 15% to 20% down on a home.

It’s being reported this added cost will be $40 per month when taking out a home loan of $400,000 (roughly .0001%). This, by itself, wouldn’t move the needle for most people but it should show the direction we are moving.

This policy rewards people who make poor financial decisions and punishes those who make good financial decisions. You always want to reward good financial decisions, why? Because it leads to more of it. By incentivizing poor financial decisions, the Biden administration is putting people and markets at risk (similar to what we saw in the 2008 crash).

This policy comes at a time of elevated interest rates, elevated home prices, and a lack of home inventory. These three together have made it one of the most expensive times to purchase a house.

Below is a graph of the 30-year fixed mortgage rate over the course 2022.

Here is another graph showing the effect of a rising interest rate on a $1000 monthly mortgage payment.

Below is a graph that shows how few “starter” homes have been built since the 1970’s.

This graph shows the monthly payment for a home with a median asking price.

This policy couldn’t have come at a worse time. Matching elevated mortgage payments with extra fees for good financial decisions will only add confusion and issues to an industry that is already struggling to keep up. New existing home sales are down 22% over the last year, the longest down streak since 2009. The home price category with the highest sales downturn is the $1M+ category (see graph below). The category with the lowest sales downturn is the $100k and under category.

Overall, home buyers are up against some tough competition. High interest rates causing higher mortgage payments are making home affordability much harder than previous years. Lack of inventory in the starter home market is keeping prices up for a large segment of the potential buyers. And now the Biden administration is adding additional fees to mortgages based on good credit scores. We are in unprecedented times.

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