The Biden administration is making moves that could imperil the safety of the housing finance system. Recent mortgage pricing changes, which have generally decreased fees for borrowers with lower credit scores and increased fees for those with higher scores, have rightly garnered public outcry, but they are the tip of the iceberg. The administration’s other changes require just as much attention, particularly since the reigning mantra of the White House is to strengthen “racial equity and support for underserved communities”—regardless of who gets hurt or how much it costs.
Missed in the debate about loan-level pricing changes is that the Federal Housing Finance Agency already distorts the riskiness of loans it originates, and ultimately taxpayers are on the hook for those loans. Every year the FHFA shuffles up to $6 billion from higher- to lower-quality borrowers. The recent changes are another progression in a series of steps under Director Sandra Thompson that have hollowed out the risk-based pricing structure erected after the 2008 financial crisis.
Progressives claim these rules need to be altered so those who have historically had a harder time breaking into the housing market can get a shot. This approach has backfired. The last great credit expansion, done with the goal of expanding homeownership in the runup to the 2008 crisis, left some 14 million borrowers, many of them minorities, seriously behind on their mortgages as home prices crashed by more than 25%.
Rather than equipping borrowers with more financial reserves and allowing them to build equity to withstand a decline in home prices, progressives are now trying to eliminate the risk of foreclosure altogether. Remove that threat and—at least in theory—everyone can afford a mortgage. Some argue that since borrowers would no longer default, we could safely expand credit.
To this end, the Federal Housing Finance Agency announced on March 29 that it’s making payment deferral available to all borrowers with “eligible hardships,” which it conveniently doesn’t define. Neither does it state how many times a borrower could take advantage of this option. While some argue that this policy worked well during the pandemic and prevented many foreclosures, it isn’t that simple. Borrowers who received forbearance also could have benefited from expanded unemployment coverage, the Paycheck Protection Program, student-loan payment waivers, other Covid benefits and the quick recovery from the economic contraction.
But it doesn’t stop there. Progressives want to eliminate the use of credit scores in mortgage underwriting or create a government credit repository. Some already have labeled credit scores racist. While these scores are predictive of defaults, they also represent an enormous hurdle to expanding credit to underserved communities, whose members typically have lower scores and thus require risk premiums. But a mortgage finance system without the threat of foreclosure or proper underwriting standards is ultimately an entitlement program. If such a program were established, it would be here to stay—and would most likely grow.
What progressives fail to understand is that access to credit isn’t the root cause holding back Americans, particularly those of color, from owning a home. Notwithstanding numerous attempts and enormous spending by the federal government, the black homeownership rate today is barely higher than in the 1970s. Instead, the U.S. is undersupplied by millions of homes, which makes buying a home more difficult. In addition, there are far-reaching shortcomings in educational outcomes, marital status and earnings that need to be addressed. These socioeconomic factors explain most of the gap in homeownership between black and white Americans.
The administration’s recent actions to expand homeownership to underserved communities are both flawed and reminiscent of similar failed efforts, particularly those made in the runup to the 2008 financial crisis. Remember when in 1994 Fannie Mae committed to “transforming the nation’s housing finance system to make it accessible to everyone”? To quote Yogi Berra, “It’s like déjà vu all over again.”
We must oppose this administration’s misguided progressive housing policies, which extend far beyond changes to mortgage pricing, and stop them before they do lasting harm.