The Biden administration has enacted a rule that forces homebuyers with good credit scores to pay an additional fee in an effort to subsidize high-risk home loans.
- In an attempt to address the home-affordability crisis, the Biden administration has chosen to subsidize high-risk mortgages with fees on new mortgages with good credit.
- A new rule from the Federal Housing Finance Agency (FHFA) says that homebuyers with a credit score higher than 680 will pay an additional $40 per month than individuals with worse credit scores.
- The rule is set to go into effect on May 1. However, a backlash has pushed the agency to delay another rule until August 1 that charges a loan fee for debt-to-income ratios above 40%, according to The Washington Times.
- Mortgage lenders and real-estate agents are warning that the move will come at the expense of responsible homeowners and punish good behavior in the midst of an economic downturn.
Why It’s Important
As we previously reported, the U.S. housing market is entering a very tough moment. Home sales and values have declined in tandem with the economy—with 6% mortgage rates and a recent peak of 9.1% inflation last June. However, real estate markets are still very tight due to large migrations from states like New York, California, and Washington to states like Florida, Tennessee, and Texas. Home values are highly inflated by demand, and the volume of available houses in desirable markets is slim.
This affordability crisis has spurred the White House into action, attempting to address the lack of available, affordable housing for poor and minority families by lowering the barrier of entry. The decision has drawn acrimony across the real estate market, as sellers warn that such an action in the midst of an economic downturn stands to harm responsible homeowners attempting to refinance their homes.
Agency director Sandra Thompson defended the fee changes, noting that the “minimal” changes are being done to protect market stability and increase purchasing power for low-income borrowers.
Backing Up A Bit
In a worst-case scenario, the decision could ignore many of the lessons learned in 2008. The subprime mortgage crisis, which led to the 2008 financial crisis, was partly caused by the federal government attempting to incentivize affordable homeownership, which led to a situation where Fannie Mae and Freddie Mac pressed banks to approve mortgages to individuals who were statistically unlikely to be able to pay them back—eventually bursting the housing bubble when mortgages began to default on payments.
As we previously reported, the banking industry is facing a similar crisis due to the second and third-largest collapses in bank history being facilitated in March by the Federal Reserve’s monetary tightening policies—a sign that the federal government’s policies are having severe effects on the economy and are likely to spark a recession.
“In the wake of a 3% point increase in mortgage rates, now is not the time to raise fees on homebuyers,” says National Association of Realtors President Kenny Parcell.
“The changes do not make sense. Penalizing borrowers with larger down payments and credit scores will not go over well. It overcomplicates things for consumers during a process that can already feel overwhelming with the amount of paperwork, jargon, etc. Confusing the borrower is never a good thing. [The rule will] cause customer-service issues for lenders and individual loan officers when consumers will not understand why their interest rate and fees suddenly changed,” Bay Equity Home Loans Senior Officer Ian Wright tells The Washington Times.