Money Rehab with Nicole Lapin - 411 on Debt Ceiling 911

Episode Date: May 10, 2023

Consider this episode your markets pulse check: debt ceiling, Fed rates, student loans... oh my!

One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that

I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details.

I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. All right, so at the time I'm recording this, there hasn't been a major banking crisis or massive fraud this week. Knock on wood or green velvet that I'm sitting on. This gives us a chance to dig into some other business news. First, let's do a little spring cleaning and clear up some questions on the debt ceiling and interest rates. Now, the debt ceiling problem, which is just a cute way of saying that the government is refusing to approve funding for laws and programs it created,

has not gone away. Make no mistake about it, the issue is a partisan one. Republicans want to reduce future debt by cutting government spending in discretionary areas, like education and canceling a lot of green energy tax breaks. Democrats have a plan to tax billionaires and giant corporations with the goal of reducing the national debt by $3 trillion over the next 10 years. Sounds like a lot of money, but the total debt is $31.4 trillion, so they've got a long way to go. While President Biden and House Speaker Kevin McCarthy had a meeting yesterday to discuss the issue, Treasury Secretary Janet Yellen has been calling up CEOs

and trying to explain why this situation is bad news for business. The government is preparing for this to be a brutal fight, no doubt, that will shake the markets until it gets resolved or delayed. Last week, the Fed raised interest rates for the 10th time in a row, but J-PAL may be suggesting that he would consider a pause on rate hikes. We also got some strong jobs numbers. Remember, the Fed is raising interest rates to try and temper inflation, which means they have to curb growth. And strong job numbers are the opposite of what they want. So making a pause seems less likely. But they do suggest that the economy is pretty resilient, despite how uncertain it can all feel. The issues with raising rates tease us up nicely

to talk about our next financial vibe check. Banks, how you doing? Better than last week? Good. Love that for you. Smaller regional banks have been on a rough ride lately, but they continue to hang on. However, the rising interest rates continue to affect banking business models. Remember, banks make money on the spread. That's the difference between what they have to pay you in interest and what you have to pay them in interest. Rising interest rates have customers looking elsewhere, like money market accounts and treasuries, to stash their cash, while at the same time those older loans that banks made when interest rates were lower are worth less than new loans. While a federal review did find that most banks are still well-capitalized,

some issues are coming up in this new banking climate. Because of higher interest rates, fewer people are looking for loans. And in response, banks are raising requirements to get a loan, which is creating a bit of a credit crunch. Other non-bank lenders are now stepping into the void that banks left. These lenders are called shadow banks. They're making credit accessible to borrowers who otherwise wouldn't be able to access it. However, shadow banks aren't as well regulated as traditional banks. So that's one ever-evolving situation on the banking front. The other that I'm closely watching right now is commercial real estate.

About 60% of all commercial real estate loans are from banks. Right now, the commercial real estate market is really struggling, and it may undergo a serious correction soon, which could add more turmoil to the banking sector. The bank story isn't over yet, but here's hoping it can chill for a minute. In a story that's been chilling for a while now, let's talk about the student loan pause. I like to give you an update on it every so often so that when it busts back into the headlines, you will be ready. The student loan pause ends or becomes official when the Supreme Court rules on the case. They're expected to release their decision in the middle of June, but if it doesn't happen for whatever reason, the pause will end on June 30th and payments will resume by about August 30th.

So in the next four to six weeks, this will be decided. Probably. It's been going on so long that it feels weird to say that it will for sure be over one way or another. This week has been all about mortgages here on Money Rehab. We started the week out with an episode on mortgage tips. I want to take a moment to break down what's going on with the new fee structure on mortgages. The first thing to know is that these are only on mortgages backed by Fannie Mae and Freddie Mac. Now, Fannie Mae and Freddie Mac are semi-federal institutions whose goal is to increase access to home ownership. In 2008, they started charging fees to lenders on high-risk loans. This practice has stuck around, and recently they changed their fee structure.

One of the biggest changes was that they increased the price structure for some less risky loans and lowered it for other higher-risk loans. For example, they raised the fees on second-home purchases, investment property loans, high balance loans, and refinances. Remember, Fannie and Freddie want to help make home ownership possible for as many Americans as they can, so other types of loans are not really mission critical for them. The increase in fees on investor properties enabled them to reduce the fees on first-time buyers with so-so credit, even if they couldn't put down a large down payment. But despite what you might have heard, if you have good credit and a large down payment, you will still pay less in fees than if you had so-so credit and a smaller deposit.

Let's look at the hard numbers. Let's look at two home buyers with mortgages on $300,000 homes. buyers with mortgages on $300,000 homes. One has a credit score of 740 and a down payment of 20%. The other has a credit score of 630 and a down payment of 5%. In the first example, that person will have fees go from 0.5% to 0.875% of the loan, whereas the so-so credit person will now have fees of 1.75%, which is down from 3.5%. So just to be clear, the good credit person is paying 0.875% in fees, and the so-so credit person is paying 1.75% in fees. Net-net, good credit is still paying less in fees than so-so credit, but more than they would have paid last year. So to put a dollar amount on it, the person with good credit and a large down payment will now pay

a fee of $2,625 on a 300 grand house. The person with not so great credit and a smaller down payment will pay $5,250 in fees. Not only that, but the person with not great credit and a smaller down payment is going to have to buy private mortgage insurance or PMI, which can easily add about $100 to a monthly payment. Mortgage insurance is required on most mortgages with down payments smaller than 20% and is designed to protect the borrower. All of these are just more reasons to avoid a 30-year mortgage and try to make regular extra payments on your principal. For today's tip, you can take straight to the bank. Are you already paying private mortgage insurance? Well, if you've been paying your mortgage for more than

five years and the value of your home has gone up, or if you've made significant renovations that have increased the value of your home, you can ask Fannie and Freddie if you can stop paying for mortgage insurance. On all mortgages, you can usually petition to stop paying mortgage insurance once you've paid off 20% of the principal of the loan. One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like

no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress.

Banking services and debit card provided by the Bank Corp Bank N.A. or Stride Bank N.A. Members FDIC. Spot me eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in Spot Me and are subject to monthly limits. Terms and conditions apply. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me.

And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.