The federalist

Financially ‘Low-Risk’ Borrowers Will Now Pay Higher Mortgage Fees In The Name Of ‘Equity’

Is the Biden Administration Hurting the Economy with Equity?

Despite concerns about a potential recession, the Biden administration seems unconcerned about damaging the economy. The latest attempt to impose “equity” will only raise costs and hurt the housing market. The Federal Housing Finance Agency (FHFA), which governs Fannie Mae and Freddie Mac, is changing the fees those enterprises charge on new mortgages. FHFA claims the changes will “more accurately align pricing with the expected financial performance and risks of the underlying loans.”

However, the changes will reduce fees for people with lower incomes and lower down payments, while people with higher credit risks will pay higher fees. In other words, FHFA is “spreading the wealth around,” as Barack Obama put it.

Encouraging Risky Behavior

FHFA arose from the taxpayer-funded bailout of Fannie and Freddie during the 2008 financial crisis. The changes the agency is imposing this week are part of a larger review of the guarantee fees the entities charge, purportedly to ensure they reflect the risk of default on behalf of the borrower.

While FHFA recently published a blog post attempting to defend the changes, a chart published by Evercore ISI Research shows the specific impact of the changes. Only borrowers with credit scores above 680, those with good credit and lower risk of default, will pay more for their mortgages. Borrowers with lower credit scores will pay less. Similarly, borrowers putting down less than 5 percent on their mortgage will have their fees reduced, regardless of their credit score. Borrowers who put down 15, 20, or even 30 percent will often see their fees increased. This is not “risk-based pricing.”

Opaque Subsidies

FHFA claims that “the targeted eliminations of up-front fees for borrowers with lower incomes…primarily are supported by the higher fees on products such as second homes and cash-out refinances,” and that Fannie and Freddie have a mandate that “include[s] references to supporting low- and moderate-income families.”

However, the Federal Housing Administration already provides low-cost loans to borrowers with limited credit histories and/or small down payments. The FHFA changes cannibalize from existing government programs and overcharge people with good credit in the process. To the extent that the changes move away from risk-based pricing, they introduce distortionary effects into the housing market. Borrowers with good credit might become dissuaded from buying a house by the prospect of paying fees they should not have to. Conversely, borrowers with poor credit or small down payments may become incentivized to borrow more house than they can afford.

The Road to Perdition

The FHFA changes come with generally laudable goals, namely expanding access to homeownership. However, as in so many other programs advanced by the left, the old axiom about the road to perdition being paved with good intentions applies. The changes could exacerbate house price increases and result in defaults and foreclosures that plagued so many communities during and after the financial crash.



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