The Boring Invstr - Your Simple, Digestible Weekly Investing & Finance Newsletter

3 General News Headlines:

1. Texas authorities are still searching for Francisco Oropeza, a 38-year-old man who allegedly shot five neighbors. Five others were unharmed.

2. Tucker Carlson and Fox News have split ties this week. This development occurred just a week after Fox News settled a defamation lawsuit with Dominion Voting Systems for $787.5 million.

3. Biofire, a manufacturer of smart guns, has recently unveiled a pre-order form for its latest product. This smart gun is equipped with advanced features such as fingerprint and 3D facial recognition sensors, which ensure that only the gun owner can fire it.

3 General Finance News Headlines:

1. The FDIC has announced that PNC Bank will acquire First Republic Bank, which was one of the banks that failed during the first three months of 2023.

2. Magnify, a new investment platform, utilizes Chat GPT and other computer intelligence programs to offer specialized investment advice and manage clients' investment portfolios.

3. US Q1 GDP growth rate missed expectations (1.6%). The miss in expectations is likely attributed to the impact of inflation on consumer spending.

Welcome Back to The Fifth Edition of The Boring Invstr!

Starting today, the Federal Housing Finance Agency (FHFA) will implement a new mortgage structure aimed at reducing barriers for borrowers with lower credit scores taking out a conventional loan through a large commercial bank (Fannie Mae) or a federally backed mortgage institution (Freddie Mac). Under the new fee structure, a borrower with a credit score above 700 and a 20% down payment will pay a low-level price adjustment (LLPA) fee of 0.875%, up from 0.5%. For borrowers with a credit score below 700 and a 20% down payment, the LLPA fee will be reduced from 3% to 2.25%. The new rule does not affect government loans or nonconventional mortgage loans.

Since news of the changes broke, many have argued the effects of the new changes. The next couple of paragraphs provide you with possible outcomes so that you can make your own opinion.

It is important to note that it is still more expensive to take out a mortgage loan with a lower credit score.

The FHFA's intended outcome is to provide easier access to mortgage loans for lower-credit borrowers, thereby reducing the disparity in homeownership rates between white and minority communities. The best-case scenario would be an increase in homeownership rates among minorities, without a corresponding increase in loan default rates or rental prices. If everything goes perfectly, these changes could make a significant impact on affordable housing.

However, as with any major policy change, it does not always benefit everyone and there are potential consequences to consider.

It is likely that banks will become more cautious about whom they lend money to. Before extending a loan to anyone, banks conduct extensive research into the borrower's credit history and employment status to determine the likelihood that the loan will be repaid. Typically, borrowers with lower credit scores are either denied a mortgage loan or charged higher interest rates. If banks become even more stringent in their lending practices, the new FHFA rule may not have its desired impact.

Secondly, the LLPA fees are intended by the government to increase the price that riskier borrowers pay for a mortgage loan. While the government could offset the decrease in fees by increasing fees for higher-credit borrowers, if the lost revenue is not recouped, someone will be affected. It is unclear whether the costs will be absorbed by taxpayers or passed on to borrowers by banks. Unfortunately, banks are unlikely to absorb the cost and will likely pass it on to their more reliable borrowers. If the government does not make up for the lost revenue, citizens will ultimately pay for the cost.

Another potential consequence is that the new mortgage structure could incentivize low credit score borrowers to borrow more, worsening the existing debt crisis. This could lead to higher default and foreclosure rates, especially if borrowers take on significant amounts of debt they cannot afford to pay back. Allowing increased access to borrowed money for low credit score borrowers raises concerns about their ability to repay the loans and could ultimately result in financial hardship for these individuals.

The new mortgage fee structure should aim to balance accessibility for lower credit borrowers with maintaining responsible lending practices, rather than simply addressing racial disparities in home ownership. Additionally, it is important to consider the potential unintended consequences of such changes, including disincentivizing responsible borrowers and incentivizing increased borrowing from those who may not be able to afford it, potentially leading to a housing market collapse. Ultimately, any changes to mortgage fees and lending practices should be made with caution and consideration for the long-term effects on the housing market and overall economy.

The final potential consequence is that increasing fees for more reliable borrowers could discourage them from taking out a mortgage loan. This combination of incentivizing lower credit score borrowers to take out a mortgage loan, while discouraging higher credit score borrowers from doing so, could have negative impacts. The 2008 housing collapse occurred due to defaults on highly leveraged mortgage loans that most people could not afford. While a collapse in the housing market is not likely due to this change alone, incentivizing increased borrowing from people who cannot afford these loans is a step closer to a repeat of 2008.

As always, I encourage you to do your own research and form your own opinion.

See you next week!