Biden’s New Mortgage Rule Is Based on a False Premise

P resident Biden’s latest attempt to turn our financial system into a political patronage machine goes live May 1. Perhaps that’s appropriate, given May Day’s roots within socialist workers’ parties, but that won’t be much comfort to the American families affected by this administration’s new mortgage rule.

Since at least the 1980s, the rate paid on a mortgage has generally tracked the credit risk of the borrower, plus, of course, a general cost of borrowing. While Biden’s new plan won’t totally undercut the current market, it will shift mortgages purchased by Fannie Mae and Freddie Mac to a flatter pricing structure. That means better-quality borrowers will pay more and weaker-credit borrowers will pay less.

Some might argue that this is consistent with the affordable-housing goals of Fannie Mae and Freddie Mac. But those goals, whatever their merit, are based on income, not credit. While the relationship between credit score and income is positive, it is also weak. Indeed, there are plenty of middle- and high-income borrowers with bad credit. They will be the primary beneficiary of this change, not the poor, who are likely to remain renters.

There is, however, a strong relationship between credit score and age. Credit scores tend to improve as people get older. Of course, this isn’t at all surprising. When young and irresponsible, some of us were, in fact, young and irresponsible. And good credit takes time to build. The average difference between FICO scores for people in their 20s and people in their 50s is about 60 points. That is enough to make the difference between subprime and prime credit.

Just as Biden’s student-debt giveaways have predominately gone to the individuals most likely to be high earners in the future, his current reduction in mortgage costs will primarily benefit younger, higher-risk borrowers. Perhaps it is just a coincidence that younger voters went for Biden and are now getting targeted subsidies.

But these young voters should be wary. This new rule may well work out badly even for its intended beneficiaries. Weaker-credit borrowers tend to have a looser attachment to the job market, and with a deflating real-estate sector and a possible recession on the horizon, Biden’s attempts to lure marginal borrowers to buy new properties could easily leave those borrowers underwater and sinking fast. Sadly, it seems Biden has learned nothing from the 2008 financial crisis. Even bank bailouts are back in vogue.

Biden’s new policy really matters because prices reflect information. When a borrower is facing a higher mortgage rate, that is conveying important facts. The borrower is being told they are purchasing at a higher risk. Perhaps they should delay that home purchase, spend some time fixing their credit, and prepare themselves for homeownership so that they will be able to actually stay in the home. By artificially reducing mortgage rates, Biden’s pricing changes will leave borrowers less informed about the risks they are about to take on.

So why would the Biden administration do this? One rationale offered is that these changes are needed to address racial inequities. And while it is true that credit scores differ significantly by race — which is in part driven by differences in age — such an approach forgets that it was racial minorities who were most hurt by the 2008 crisis, with many people of color having bought properties at the top of a housing boom.

There is a better way. I am proud of the record increase in black homeownership that occurred during my tenure heading the Federal Housing Finance Agency. When my tenure began, the black homeownership rate was 40.6 percent. Upon my departure, it had risen to 44.6 percent, the largest annualized increase on record. That didn’t occur due to weakening the mortgage market. In fact, I strengthened underwriting standards at Fannie Mae and Freddie Mac. I focused on sustainable homeownership. Not gimmicks.

In the time since my departure in June 2021, black homeownership levels have barely moved, ending 2022 at 44.9 percent. All this despite Biden’s continued weakening of mortgage credit standards.

I predict the new changes will have no noticeable effect on homeownership, black or otherwise. That’s because they are based upon the false premise that the borrowers’ credit is outside their control: something that just happens to them.

But credit scores are highly predictive of a borrower’s success or failure, and they can be improved with effort. Instead of offering quick fixes and quack remedies, I encourage the Biden administration to build a strong foundation under our mortgage market. Doing so will ensure that American families are better positioned to weather the next storm, whatever its source.