In our current financial system, paying your bills on time and making wise spending choices usually boosts your credit score.
Generally, higher credit scores lead to lower interest rates on consumer debt and lower costs. That is, financial responsibility is rewarded.
In the Biden administration’s bizzaro policy world, it no longer pays to be prudent, or otherwise responsible - while striving to do the right thing, at all times.
Some mortgage holders with higher credit scores will pay higher mortgage fees while some debtors with lower credit scores will pay less.
President Joe Biden believes he is making mortgages more equitable.
However, this feels like a redistribution scheme, one that punishes responsible Americans.
How could this possibly go wrong, right?
This week, Fannie Mae and Freddie Mac implemented a new round of loan-level pricing adjustments (LLPAs).
These are adjustments to the "price" of a loan, which determine a borrower’s mortgage rate. Instituted in 2008, these adjustments allow the government to raise prices for "riskier" borrowers without penalizing "safer" borrowers.
Except this time they are stretching that general principle.
The new changes reduce LLPAs for low credit score borrowers and those with lower down payments while increasing LLPAs for homebuyers with good credit and larger down payments.
Additionally, as a result of these policy changes, it will become more expensive to refinance mortgages.
Consider this scenario: Prior to May 1, a homebuyer with a credit score of 74 who made a 20% downpayment could pay 0.375% fee on a $300,000 loan (or $1,125).
Under Biden’s lending rule, after May 1, that borrower could pay as much as 0.875% on the same loan (or $2,625).
A borrower who made a 20% down payment with a credit score of 640 would see his or her fee drop 0.75% from 3% ($9,000) to 2.25% ($6,750).
While the fee will still cost the home buyer with the lower credit score more, the principle is worrisome.
Even worse, those who make down payments of 20% on their homes will pay the highest fees. A 20% down payment is preferred to avoid paying for private mortgage insurance, to lower the loan amount, and for smaller monthly payments.
It helps ensure that home buyers aren’t buying more house than they can afford in the long term. Why is the government now discouraging this kind of prudent planning?
Some claim that the higher government fees will not be used to subsidize higher-risk borrowers. Yet it’s undeniable that in many instances those with good credit will be paying more in fees to the agency, and those with less than stellar credit will pay less.
The agency explained in a letter that these changes "represent the next step in our effort to increase support for borrowers historically underserved by the housing finance market while ensuring a level playing field for small and large lenders, fostering capital accumulation, and achieving viable returns on capital."
Read this as a ploy to pander to Black voters.
Targeting this program at the "historically underserved" is understood to mean Black borrowers whose homeownership rates lag behind those of other demographics.
According to the National Association of Realtors, the Black homeownership rate is 44%, which is 6.6 percentage points behind Hispanic Americans (50.6%), almost 19 percentage points behind Asian Americans (62.8%), and nearly 29 percentage points behind White Americans (72.7%).
The homeownership gaps are undeniable.
However, is the solution to straddle homeowners of all races–including Blacks–who work hard to save a 20% down payment with higher fees?
This is equity in action.
Equity and equality are not the same.
Equality is a foundational principle of our nation that rests on the idea of fairness. Equality aims to give everyone a chance to compete whether for a job, a scholarship, or a home.
We may not achieve the same outcome, but the competition was accessible to all.
Equity unfairly holds back some while pushing others ahead in the competition.
Advocates foolishly believe that they can engineer the same outcome for everyone regardless of the natural advantages one begins with or the personal agency (i.e., choices, time, effort, and resources) that an individual exerts.
In the housing market, financial discipline can ensure equality regardless of skin color.
All borrowers should be able to access the same financial instruments regardless of race or other immutable characteristics, but that doesn’t mean lenders should be forced to ignore relevant risk factors about a borrower's ability to pay.
High credit scores built by consistently paying bills on time and maintaining healthy debt-to-income ratios benefit those who practice good financial stewardship.
Good stewardship is not a matter of income level either.
A working-class borrower can have a 750+ credit score while a high-income earner may have a credit score in the 500s.
How fair is it for the working-class guy to give up even more of his income in fees while a high-income borrower, who can afford to pay more, gets to pay less?
If the Biden administration wants to help Black borrowers, help all borrowers understand how good financial stewardship pays off.
Don’t lower the bar by rewarding suboptimal financial choices.
Otherwise — we’ll end up with subprime results.
Patrice Onwuka is a political commentator and director of the Center for Economic Opportunity at the Independent Women’s Forum. Patrice is also an adjunct senior fellow with the Philanthropy Roundtable and a Tony Blankley Fellow at The Steamboat Institute. Follow her on Twitter: @PatricePinkFile Read Patrice Lee Onwuka's Reports — More Here.
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