The federal government props up the housing market in too many ways to count. The U.S. is unique among rich countries in having the national government insure mortgages, guarantee mortgage securities, and finance mortgages with government-sponsored enterprises. The supposedly temporary conservatorship of Fannie and Freddie continues to this day, effectively nationalizing them. Federal spending on housing has soared over the past few decades.
Despite all of this government involvement, homeownership rates are middle-of-the-pack in the OECD, and housing in some of the most populous metropolitan areas in the country is prohibitively expensive for many potential homeowners.
When government isn’t getting the results it wanted with all of its previous involvement, it tries a little more intervention to “fix” its previous interventions. To help out homebuyers with poor credit scores, the Federal Housing Finance Agency has decided that homebuyers with good credit scores will pay a little more for their mortgages.
“Mortgage industry specialists say homebuyers with credit scores of 680 or higher will pay, for example, about $40 per month more on a home loan of $400,000,” reported the Washington Times. “Homebuyers who make down payments of 15% to 20% will get socked with the largest fees.” The fees — “junk fees” by any measure — will start after May 1 for new homebuyers or people who refinance.
Potential homebuyers do face a problem in high nominal interest rates right now, although there is an argument that (because of the interaction with the tax code) this may be less of a burden than it appears, at least for the median homebuyer. It is, incidentally, worth remembering that one reason that rates have risen is because of Democrats’ irresponsible spending, which contributed to the inflation that the Federal Reserve had to raise rates to quell.
FHFA director Sandra Thompson said the new rules (which would use the redistributed funds to reduce the interest rate paid by less qualified buyers) would “increase pricing support for purchase borrowers limited by income or by wealth.” But income and wealth are and should be limiting factors in lending. It’s not good for borrowers to take on loans that may prove beyond their means to pay back.
Financial institutions check creditworthiness because they want to be paid back; it doesn’t do them much good to lend to people who can’t afford the installments. The more the cost of a mortgage is reduced on other than financial grounds, the more the price signal sent by the level of an interest rate is distorted. The greater the distortion, the greater the danger to the borrower and to either the lender or, if Fannie or Freddie buy the loan, its guarantor.
On the borrowers’ side of things, this policy reduces the incentive to be responsible. Not everyone with a low credit score got it from being irresponsible, but plenty of people with one did. Programs that seek to downplay poor creditworthiness are moral hazard enough, and we have plenty of those already. This new policy has the added twist of penalizing people with high credit scores. So not only will poor decisions carry fewer consequences, but good decisions will carry fewer rewards. That’s one way to get more poor decisions and fewer good ones.
This isn’t some hard-hearted nonsense. It’s a reflection of the fact that progressives in government often ignore the effects their decisions will have on the functioning of markets. There’s a place for sensible programs aimed at housing affordability, but if all the ones we already have aren’t working, it’s worth looking into why that’s the case and how they can be improved before adding yet another subsidy with perverse incentives to the mix.
And perhaps, for once, consider the supply side of the equation. Subsidizing demand for housing isn’t going to help if supply doesn’t expand along with it. Consider removing tariffs on construction materials, selling federal land, relaxing costly environmental regulations that delay projects, and reforming zoning and land-use policies to permit more housing construction.
The housing market is far from a proper market already. The FHFA is moving it even further away from anything resembling one. It’s time for a move in the other direction.