Rates Are Getting Worse (No, For Real)
I agree with most of what is being said below, but it is much more complicated as well. Fannie and Freddie are making tons of money and will soon make even more with the new changes. The funny thing is, because they are under conservativeship of the Feds, they are not getting any of the money. The government needs to let them lose but insist they are not so profitable so consumers can save money when they do a loan.
Rates Are Getting Worse (warning, this is a rant, albeit an informational one, I hope)
Back in April Fannie Mae & Freddie Mac, the nation's 2 mortgage giants, announced that changes would be forthcoming to LLPA (loan level pricing adjustment) charges, better known as "risk based pricing", and those "changes" aka "things getting more expensive", are finally here. When risk based pricing came into existence, it made quite a bit of sense - investors should receive a higher return for riskier investments, right?
For example, prior to risk based pricing on conventional loans, a borrower with a 620 FICO and a 5% down payment was getting similar rates and pricing to a borrower with a 720 FICO and a 25% down payment. Risk based pricing changed all that with Fannie & Freddie applying pricing adjustments, or LLPAs incrementally to each new risk "basket" that they came up with - most of these baskets were on a sliding scale based on FICO scores and LTV's. With this action, low FICO/low down payment mortgages were still offered, but at significantly higher rates than high FICO/high down payment loans.
Makes sense, right?
Well now Fannie & Freddie are piling on with increased adjustments across the board. Low FICO, high FICO, low down payment, a little more down, it doesn't matter, everyone's getting screwed. Except of course Fannie, Freddie, and the US Treasury, who combined are pulling in billions. That's BILLIONS, with a "B".
Let's take a closer look at this and break things down. How does the mortgage industry make billions? Well, first off, there has to be volume. There has to be a pretty wide profit margin. There also has to be negligible loss. With current underwriting standards and loan packaging processes, risk on conventional mortgage loans is lower than it's been in well over a decade, yet the product continues to get more & more expensive, always in the name of "risk". Over the years we've had "G Fee" costs created out of thin air by Freddie & Fannie. These costs were passed on to the consumer in interest rates. LLPA costs are also passed onto the consumer through interest rates. It's safe to say rates are at least .5% higher than they should be (that is, .5% higher than they would be if they weren't stuffed with LLPA costs and G fees).
Are you understanding this yet? For all intents and purposes, the US Treasury is running the show at Fannie Mae & Freddie Mac. It's safe to say that most home buyers are also taxpayers. So you're telling me the taxpayers bailed out Fannie Mae & Freddie Mac when the meltdown occurred & they were hemorrhaging money - and now that the companies are back to beyond profitable, the taxpayer will continue stuffing their coffers through higher interest rates for each & every loan, regardless of how great or low a borrower's risk is?
How much can taxpayers take before their backs break? How many costs can be stuffed into home buying (there are already thousands of dollars included in G fees and LLPAs for each transaction - this isn't even scratching the surface of real estate taxes, transfer taxes for buyers and sellers, and increased mortgage costs, which are also a result of over-regulation) before buying a home is simply no longer a good investment?
These costs are the kind of thing that are killing the American dream. This type of theft is EXACTLY why both the left and the right side of politics are wrong- big government is obviously robbing the American people, but cutting out government completely creates an atmosphere similar to that of pre-meltdown, which was simple private enterprise robbing the American people. What we're left with is government supervised big business profiting from "investments" that carry nearly no risk thanks to suffocating over-regulation, and priced at a premium in the name of "risk".
What's sad is that most people have no idea any of this is going on - they just see daily rates posted and advertised. They have no idea that rates, in reality, should be about .5% or more lower than they are today. They have no idea they're being taxed under the table through their interest rate. If they did, I wonder if they would be angry? I wonder if this would be a talking point in the next election cycle?
Let me be clear - something had to be done post-meltdown by the government. Instead of fixing the problem, though, they're simply profiting from it. Now rates will increase again because of "risk" that's not really there. In the end, who's getting screwed?
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