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Blog Post

Yet More Absurdities in Biden’s Housing Policy


July 18, 2023

In a recent Wall Street Journal op-ed, my colleague Ed Pinto and I recently raised alarms about how the Biden administration is doubling down on the same failed policies that preceded the housing crash of 2008. Unfortunately, policymakers keep dreaming up new and equally absurd housing policies.

The latest move comes from the Federal Housing Administration (FHA), the government’s lender for low-income Americans, which is proposing to offer borrowers near-permanent loan forbearance, no-questions asked. Soon, a lender will no longer inform a borrower who has missed a mortgage payment, that it is his or her responsibility to bring the loan current, but will instead announce that the borrower has been granted a 25% interest-free payment reduction for the next five years. Just date, sign, and return. What may seem like a slap in the face of any hardworking American may become reality for millions of mortgage borrowers.

Handouts like the proposed Payment Supplement Partial Claim create an obvious moral hazard that far outweighs the benefits of avoiding foreclosures. Even if the forgone amount will be tacked on to the end of the loan, it still represents a significant monthly savings that many borrowers may not even need, but may find hard to forgo. Some may even strategically default to qualify for the payment reduction. To make matters worse, as long as funds remain, a borrower may claim this payment supplement every five years, which means that it could be re-upped just when the prior supplement expires. What could possibly go wrong?

It is true that FHA has already been running a similar Partial Claims program that it started during the pandemic, but it was the President’s long-overdue declaration ending the COVID-19 national emergency that forced its hand. While FHA was able to extend the pandemic program until October 2024, the program as written would have limited a borrower’s ability for repeat relief. Instead of phasing the program out altogether, FHA is now trying to make it permanent and expand it, showing how detached progressive policies have become from reality.

Ironically, the entire problem of borrowers falling behind on their payments is of the government’s own making. FHA in its underwriting allows excessive debt ratios, which allow borrowers to set aside as much as 57% of their gross income for debt payments, which severely limits how much money a borrower can set aside for a rainy day fund. FHA could ensure that its borrowers hold cash reserves to weather a couple of months of unforeseen expenses or it could limit excessive debt ratios.

Ultimately, FHA could also start to encourage borrowers to borrow at shorter loan terms, which would enable them to build equity more rapidly. The payment relief that comes from modifying a 20-year loan with a lower loan balance into a 30-year one can be meaningful—even at high mortgage rates. On top of that, FHA should rein in its demand-driven policies such as its various mortgage insurance premium cuts that promote higher home prices thus necessitating the need to take on more debt to buy a home.

As we said in the op-ed, “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.”

Therefore, “[w]e must oppose this administration’s misguided progressive housing policies and stop them before they do lasting harm.”