Wealth Blog Post

The Tax on Personal Financial Responsibility

George Grombacher April 21, 2023

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The Tax on Personal Financial Responsibility

Our Founders believed that a virtuous citizenry was essential for a sustainable republic, and that they needed to enact laws to promote those virtues. 

On May 1st, Loan-Level Price Adjustments will go into effect, penalizing borrowers with good credit who make down payments when buying homes, and rewarding borrowers with lower credit who don’t make a down payment. 

I find this troubling. 


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Episode Transcript

The founders of the country believed that a virtuous citizenry was essential for a sustainable, successfully functioning Republic. Us. So another way to put that is, if we’re going to be successful as a country, we individually must live virtuously. And founders recognize that in order to promote, set virtue, that they needed to promote virtue through the laws that they put in place. So make sense. Here’s what we want. We want people to be virtuous, we want people to act appropriately, to be personally responsible, to be autonomous, to have sovereignty. So if that’s what we want, how can we incentivize that kind of behavior? Well, we’ll make laws that incentivize that kind of behavior, and it will all work great. And for a long time, it really did. And it still is, I was scrolling through Twitter last night, which is really never a great idea. But like a moth to the flame, I just, I just can’t help myself sometimes. And it came upon tweets about about something called loan level, price adjustments. Low level price adjustments. Have you heard about these? Are you familiar with what’s going on? I just spent a little bit of time this morning familiarizing myself with them. And spoiler alert, I’m not thrilled with it. I think it’s mildly preposterous. I’m not outraged. But I don’t know if there’s anything that really outrages me. But I think that this is really, really, really dumb. I think it’s short sighted, I think it’s, I think it completely lacks wisdom. And so I wanted to spend a little bit of time talking about it, because I don’t know that I would have heard about it unless I had done the whole scroll thing that I was just telling you about. So are you aware of this? Are you aware of what is going on here? So if the idea is through our lawmaking through our laws and our regulations, we want to promote virtue in individuals. This new law is the antithesis of that it is absolutely doing the opposite of it. Quick question, is it better to be personally responsible? Or is it not? Is personal financial responsibility a good thing? Or is it a bad thing? It’s a good thing. And if that’s a good thing, if that’s a virtue, to be frugal, to be responsible, to be temperate, to, to, to live moderately, instead of blowing all of our money, instead of doing things consistently, which are hurting us? If those are good things, well, then how do we promote that we would be promoting that through laws and regulations through the taxation of things. But that’s, that’s not what this new program is doing. So the new program goes into effect. And the idea was, I believe that the idea is, we want more people to own homes. So we want to subsidize people who are not currently homeowners, so people that are not financially well enough to buy a home, we want to incentivize them and make the path to homeownership. Easy. We want to make affordable housing easy. Now. I, I think that if you were to say, is that a good thing? Sure. That is a good thing. Wanting to have more people enjoy homeownership is a positive thing. So perhaps people’s hearts are in the right place. And we’re trying to do a good thing. But the attempt at a good thing and the means of doing that which are increasing costs on borrowers who have good credit, who are making down payments, that’s what this program is so probably should have led with that. Loan level price adjustments, increase the lending costs, it assesses and actual fee on good borrowers with good credit who were put on a down payment down and decreases fees on borrowers with bad credit, who put smaller down payments, if any down. Okay. So that is how this program works. We want to put more people at homes, how are we going to pay for that going to assess fees on the other borrowers who have the financial means to do it, theoretically speaking. Okay, so that is what the program is. And I’m going to break down exactly how it all works in in just a minute or two. But just wanted to go over that the principle is it better be financially responsible? Yes. Is this law promoting financial responsibility? No, it is doing the opposite of that is literally doing the opposite of that it is penalizing you for being financially prudent and financially responsible. It’s penalizing you for that. And it is rewarding borrowers who are not financially responsible or not financially prudent. Now, do we know? And I bet you do. Why? Why lenders, why banks assess fees, or charge more, for people who have bad credit or less than great credit to borrow their money? Well, it’s because they are a higher risk of not paying the money back. That’s why. So there’s a premium on that. It’s just like, if you are a smoker, and are 100 pounds overweight, and are a terrible driver, and have committed crimes, that the premium on your life insurance will be higher than somebody who does not do those things. It’s a risk assessment. If you’re risky, you will pay more because you are a risk. Okay, that makes perfect sense. So that’s why people with good credit, get lower rates, because the odds of them paying the money back are higher. And banks, whether we love banks or not, they’re in the business of lending money, and getting that money back with interest. That’s the deal. And it’s a pretty good deal. So that flies in the face of what it is that we’re doing. So misaligned incentives, it just, it just doesn’t make any sense to me. Again, I appreciate that people’s hearts may be in the right place. But how the following through on it just doesn’t make any sense at all. So how is it actually working? So in there, you can, if you’re interested in finding the articles on this, I searched borrowers with good credit, paying fees, and it’s going to affect on May 1. And the examples that were used were examples of people with credit of between 606 80 and 780 would be paying a premium on loans of around $400,000. And what they said was they would pay about $40 a month extra. Okay, so $40 a month extra. That’s not that big of a deal. Probably what people are saying or thinking they’re glossing over sort of the big picture. And what’s really going on here or the principle of it? Well, $40 a month times 12 is $480 a year. That’s a lot of money. In fact, one of the one of the numbers that gets thrown around quite a bit when we’re talking about the current state of Americans personal finances, is that the majority of Americans wouldn’t be able to come up with $500 in case of an emergency.

And now we’re taxing people who are actually more financially prudent and and disciplined with that same amount $480. Well, that’s 500 bucks. So we’re charging you somebody who has good credit who has done the right things financially. Now, we’re going to assess this $500 penalty on you for doing that, even though you probably don’t have $500 in cash. So, briefly, a basis point basis point is point 1% of $1. Or rather point 00 1% of a percent. Okay, so a good way to think about that is like $1 is made up of 100 sets 1% is made up of 100 basis points. Okay. So what is $480? Up from the perspective of basis points on $400,000. So if I have a $400,000 loan, what is my penalty that I’ve been assessed for being for having good credit? It’s 12 basis points. Okay, foreigner grand temps 12 basis points is $480. So that is essentially the fee that has been assessed if my credit is between 680 and 780. Okay, But it gets worse, believe it or not, if you have credit between 680 and 780, and you make a down payment of between 15 and 20%, which is exactly what if you were just to read the book on how to be a responsible homeowner. And, you know, what would it say would say have a 700 credit score, and make a 20% down payment, way to go, you have worked really hard and saved a lot of money. And this example, because you don’t want to see me do math on the fly here. But on a $400,000, home, times 20%. That’s $80,000. So you, borrower, American consumer, saved $80,000, for a down payment on a home. That’s a lot of money. Great job of doing that, we are going to assess you a penalty of 1% a 1% tax on that. Now we’re talking about real money. 12 basis points, again, is essentially 12 pennies in terms of $1. So it’s point, one 2%. one basis point, that’s a full dollar. So that’s 100 basis points 1%. So again, you busted your butt saved $80,000 have great credit, great job. Now, instead of rewarding you with lower fees for doing exactly what you’re supposed to do with money, save, be disciplined, put a downpayment down have good credit, Nope, we’re going to charge you an additional 1%. Now to be, I guess, whatever the term is, to be fair about it, there was a 25 basis point fee currently, for this new law goes into effect. So point two 5% 25 basis points, that’s now 1%. So it’s an additional 75 basis points that are tacked on to pay that. So that is a substantial amount of money. For $400,000, again, just keep in our example of a $400,000. Home, the increase from 25 basis point to 1% 100 basis points. So that’s 75 basis points. That’s $3,000 a year, three grand a year, $250 a month. Now that is you don’t think 454 and $80 is real money. Three grand is real money. That is a lot of money. So substantial, that is a huge penalty. And what about for borrowers with 679 credit scores and below, where they get their fees slashed by 175 basis points from the previous fee levels. So one point they get a discount on currently, what they’re paying, starting May 1, when this new law goes into effect, they will pay 1.75% less than they’re currently paying. So how do we pay for that? How do we offset that? Well, that’s what this loan level price adjustment is doing. So beginning May 1, if you’ve got bad credit, and you’re not making a down payment? Well, we’re going to we’re going to reward you with a 1.75% bonus, essentially. How does any of this makes sense? We are again misaligning. Our incentives. We’re saying you save money, get good credit. No, we’re going to penalize you for that. In favor of, you’ve got bad credit, you haven’t saved any money. We’re gonna reward you for that. It’s crazy. I think it’s crazy. And as I talk, I’m moving closer to outrage. I’m moving closer in that direction. And I think that that is a real real shame. I think that there is absolutely zero wisdom in any of this. Maybe again hardest in the right place, but it’s not a wise thing. Again, our founders believed that a virtuous citizenry was essential for a sustainable Republic. And they knew that they had to do that by promoting virtuous laws to set up good incentive structures What do we want? We want, we want our people to be personally financially responsible. That’s what they wanted. It almost makes you say, is that what we want now? And I don’t know the answer to that. I don’t know what’s, uh, I don’t know what’s going on. But I do know that I do not agree with this law. I do not agree with it. I think that it is setting a dangerous precedent. And I imagine that they’re just hoping that people aren’t really paying close enough attention to it. But if you’re looking around, and you’re trying to figure out why it is that things aren’t going the way that maybe they ought to be going, it’s because we’ve gone on for a long time, not paying really close enough attention to things. And now that’s starting to change. So I want everybody to be happy. I want everybody to get what they want. And I know that there’s a fee for that. And it’s not a loan level price adjustment. It is personal responsibility. It’s self discipline. It’s supporting our loved ones supporting our community, it’s doing the right things. It’s living a virtuous life. So thanks, check it out. We’d love to hear from your perspective. And like anything else, I just read about this last night. And so my thought process is constantly evolving as I take in new information. So I could be way off base on this. And if I am, I’m thrilled to, I’m thrilled to take in new information and learn, say, Hey, I was wrong. I was way way off about this. I didn’t know what I was talking about. Or I had my numbers wrong, whatever it might be. But as of right now, looking at this, it’s very frustrating. And I think it is again, pushing us further down, moving us further in a direction that I don’t think is going to help us to have this sustainable country that I certainly love so much and that I’m confident that you do as well. So as always, remember, you do your part by doing your best

Transcribed by https://otter.ai

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