April 25, 2023

Prudent Homebuyers Punished by Biden

Just as with his student loan forgiveness scheme, Joe Biden is once again trying to redistribute the wealth of responsible Americans.

As the old adage goes, “No good deed goes unpunished.” And this administration is living proof of it.

It’s bad enough that prospective homeowners are now facing the twin obstacles of high home prices and even higher interest rates — interest rates roughly double what they were two short years ago. In addition, a new federal rule slated to take effect May 1 tilts the playing field even further toward that same type of homebuyer who got us into the Great Recession 15 years ago. (Our Mark Alexander has a reminder of how we arrived there.)

While the differences are subtle between the old Fannie Mae price adjustment matrix and the new one, the upshot is that families who may opt for the frugal “staycation” instead of heading off to someplace exotic are going to be paying a little extra every month to subsidize those borrowers who lack responsibility and have subpar credit scores.

As Thomas Barrabi of the New York Post explains: “Under the revised LLPA pricing structure, a home buyer with a 740 FICO credit score and a 15% to 20% down payment will face a 1% surcharge — an increase of 0.750% compared to the old fee of just 0.250%. On a $400,000 loan with a 6% mortgage rate, that buyer could expect their monthly payment to rise by about $40. Meanwhile, buyers with credit scores of 679 or lower will have their fees slashed, resulting in more favorable mortgage rates. For example, a buyer with a 620 FICO credit score with a down payment of 5% or less gets a 1.75% fee discount — a decrease from the old fee rate of 3.50% for that bracket.”

And not only that: Borrowers who maintain debt-to-income ratios better than 40% would also have an additional fee to help subsidize the spendthrifts. Outcry from lenders, though, got that fee pushed back to August 1.

This is not to say that there shouldn’t be incentives for people who wish to improve their lot in life by buying a home — residential ownership is still one of the best routes to financial success. But as the editors of National Review caution, the perverse incentive from the Biden administration is “a reflection of the fact that progressives in government often ignore the effects their decisions will have on the functioning of markets.” Moreover, The Wall Street Journal warns about more ill effects of the proposal, particularly in the sort of working-class neighborhoods where first-time homebuyers often purchase.

There’s a point at which potential purchasers are typically ready to buy a home. In the past, that point would be when the breadwinners had a steady job, demonstrated an ability to pay their bills in a timely fashion, and had saved up enough money to provide a significant down payment, thus putting their own skin in the game.

Government intervention has helped obviate the need for that large down payment, but there must still be a mechanism by which borrowers are able to show lending institutions that they present a good risk; that they’re responsible enough to pay their debts. That mechanism is one’s credit score. Banks, after all, want to lend money. What they don’t want to do is take ownership of property that their customers have defaulted on.

Unfortunately, we have a presidential administration that has already shown its penchant for perverse incentives by favoring those who’ve borrowed more for their college education than they were able to pay back. Thus, this mortgage lending scheme may simply be the next step in creating an entitlement system that’s unduly subsidized by the most responsible borrowers among us.

Indeed, with Joe Biden and his fellow Democrats, no good deed goes unpunished.

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