Punishing success with higher mortgage rates?

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The Biden administration recently implemented changes to fees on mortgages that are backed by government-sponsored enterprises Fannie Mae and Freddie Mac. Our old friend Mark Calabria, former director of the Federal Housing Finance Agency, wrote about this development recently for National Review, and he’s not happy about it.

Generally, when it comes to mortgages, the cost of getting one involves an interest rate that’s commensurate with the credit risk of the borrower. The stronger your financial history, the lower the rate you’re going to qualify for, since that’s what gives banks confidence that you’ll be able to repay. The new Biden plan for mortgage rates will be to flatten the price structure so that everyone pays closer to the same rate, meaning that borrowers with poor credit will be paying less than they otherwise would have and those with excellent credit will be paying more than they otherwise would have.

The main beneficiaries will likely be younger Americans who have a decent income but have not had the time to build up an impressive credit score. Calabria suspects that this is a group that President Biden is especially interested in courting politically. The administration’s controversial student loan forgiveness plan targets a similar young but upwardly mobile subset of the population.

For some people, this will seem like a generous, welcome change, in which we effectively redistribute creditworthiness rather than income through government regulation. But Calabria has a warning. He writes:

This new rule may well work out badly even for its intended beneficiaries. Weaker-credit borrowers tend to have a looser attachment to the job market, and with a deflating real-estate sector and a possible recession on the horizon, Biden’s attempts to lure marginal borrowers to buy new properties could easily leave those borrowers underwater and sinking fast. Sadly, it seems Biden has learned nothing from the 2008 financial crisis. Even bank bailouts are back in vogue.

The real problem here with redistributing credit is that those credit scores and rates represent real information in the economy. They’re not assigned at birth or the result of fate or destiny beyond our control. People with weaker credit are less likely to repay mortgages or other forms of consumer debt like credit card balances.

If government policy arbitrarily disregards that relationship we’re simply going to get worse outcomes for banks, the economy, and, as Calabria points out, even for many individual borrowers themselves. It’s as if Americans were in a weight lifting competition, and we decided to put weaker competitors in the heavy-lifting, rather than entry-level, division of competition to bolster their self-esteem. We can imagine the unfortunate consequences that would result from such a mismatch.

Pretending people are stronger than they are doesn’t make it so, and pretending that people have better credit than they really do doesn’t change reality either. Credit scores reflect financial reality and are predictive of future financial success – they’re not made up by corporate meanies who are trying to hold you back in life.

Banks want to lend to customers – that’s how they make money. They just want to have a reasonable expectation that’ll get that money back at some point. Trying to distance lending from creditworthiness will simply make the entire banking and housing sector less good at what it’s supposed to be doing.

We covered this topic, by the way, in Episode 19 of the Free the Economy podcast; the mortgage segment starts around 4:45 in. The Competitive Enterprise Institute also hosted a book event in April 2023 (watch on YouTube) with Mark Calabria and CEI President Kent Lassman to showcase Mark’s recently published book Shelter from the Storm: How a COVID Mortgage Meltdown Was Averted.