President Joe Biden’s mortgage adjustment plan brings critics home
Haisten Willis
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President Joe Biden’s administration has once again hatched conservative outrage, this time by adjusting mortgage rates at the colossal Freddie Mac and Fannie Mae enterprises.
The administration says these changes are simply a long-anticipated update intended to “bolster safety and soundness,” while its critics call it a misguided attempt to inject the wrong kind of equity into the housing market.
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“Where diversity, equity, and inclusion and redistribution reign over incentives to promote opportunity and growth, we have a new outrage,” former National Economic Council Director Larry Kudlow said on Fox News. “It’s another example of Biden’s war against success.”
The controversy erupted when Federal Housing Finance Agency Director Sandra Thompson announced a rejigging of mortgage fees at Fannie and Freddie, which collectively originate more than half of all mortgages in the U.S. The change would, in the aggregate, see costs go up for buyers with good credit and down for those with bad credit.
The backlash was fierce and widespread.
Kudlow, a top economic adviser in former President Donald Trump’s administration, was joined by other conservatives and by mortgage industry groups.
Sen. Tim Scott (R-SC), a Republican and likely presidential candidate, said the move could make it harder for middle-class families to make homeownership a reality. And 18 Republican senators issued a letter blasting the proposal, while a group of House Republicans announced it is seeking to overturn the rule.
“The FHFA, led by a President Biden-appointed director, is punishing financially responsible mortgage borrowers,” Rep. Andy Biggs (R-AZ) said in news first reported by the Washington Examiner. “Their agenda of equity over equality defies common sense and will endanger the stability of the housing market.”
To be clear, home buyers with good credit scores and larger down payments will still pay less overall than those with bad credit scores and smaller down payments.
However, the rate changes are mostly negative for those with credit scores above 680 and universally neutral or positive for those with credit scores below 680 and those making a down payment of 5% or less. For those with higher credit scores, the new fees could be up to $3,200 higher over the course of a loan. The rule went into effect May 1.
The FHFA responded to the outcry with a press release on April 25 that promised to set the record straight. Thompson said the fee increases were part of a wider effort to raise rates on second-home loans, high-balance loans, and cash-out refinances, while lowering fees for first-time homebuyers with lower incomes.
“They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers,” she said. “Many borrowers with high credit scores or large down payments will see their fees decrease or remain flat.”
FHFA officials also point out that those with exceptionally high credit scores of 780 and above will mostly see their fees go down relative to the old scale.
The White House referred questions from the Washington Examiner back to the FHFA.
Urban Institute fellow Jim Parrott made largely the same argument as Thompson, writing that the agency increased prices for loans with less justification for government support in order to decrease costs for people who “genuinely need help,” meaning borrowers with limited wealth or income.
The question is how those changes will affect the risk profile going forward for both individual borrowers and the market as a whole. Kudlow was one of many critics who pointed to the 2008 financial crisis as an example of what happens when mortgages are approved for people who will struggle to pay them.
The Republican National Committee even cried racism with a newsletter blast titled “Biden Admin Targets Asian American Homebuyers.”
“The American dream has always offered people hope that if they work hard and save responsibly, they can get ahead and buy a home,” RNC spokesman Tommy Pigott said. “Democrats want to destroy that American dream, and if you’re Asian American, there’s seemingly no policy they won’t enact to hold you down.”
The housing industry mostly opposes the move as well.
Mortgage Bankers Association CEO Robert Broeksmit sent his own letter arguing the timing is bad — mortgage payments overall have soared by 85% since 2020, and the summer buying peak is nigh. The National Association of Realtors and National Association of Home Builders also spoke out against the measure.
One key issue is whether or not the adjustments amount to creating a cross-subsidy of payments from those with better credit scores to those with worse. Government officials fiercely deny that this is the case, while conservative scholars such as the Cato Institute’s Mark Calabria say it is.
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But the Biden administration’s FHFA insists the move is simply about giving would-be homeowners a fair shot at achieving the American dream.
“It had been many years since a comprehensive review of the Enterprises’ pricing framework was conducted,” Thompson said in her statement. “The objectives were to maintain support for purchase borrowers limited by income or wealth, ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time.”