When did being creditworthy become a federal crime? The Biden administration is intentionally punishing homebuyers with good credit scores to subsidize people with shaky histories of paying their debts. But the latest salvation scheme ignores the sordid history of federal policymakers ravaging homeowners they promised to rescue.
As of May 1, a Biden administration decree requires adjusting mortgage calculations to penalize homebuyers with a FICO credit score of above 680 — almost two-thirds of the population. This levy will be used to reduce costs for people with low credit scores — that is, risky borrowers more likely to default on mortgages.
Congressman Michael Lawyer (R-NY) complained, “This new rule unfairly penalizes Americans for having good credit and rewards those who accrue debt and don’t pay their bills with cheaper loans.” Former Federal Housing Finance Agency director Mark Calabria emailed me that moving away from “risk-based credit … will ultimately harm both borrowers and financial stability.”
Federal regulations require that all charges and credits to buyers and sellers be explicitly listed in mortgage settlement statements. The new federally mandated penalty for creditworthy borrowers should be explicitly listed on loan documents as a Social Justice Surtax. That surtax could amount to $60 or more per month — equivalent to more than $20,000 over a 30-year mortgage.
The new compulsory cross-subsidy is part of the Biden crusade to close the homeownership gap between black and white families. “The average credit score in white communities was 727 in 2021, compared with 667 in Hispanic communities and 627 in black communities,” Newsweek noted.
According to Federal Housing Finance Agency director Sandra Thompson, the new rules are designed to “increase pricing support for purchase borrowers limited by income or by wealth.” She testified to Congress last year that the racial homeownership gap “is higher today than when the Fair Housing Act [of 1968] was passed.” But Thompson neglected to mention the long record of federal urban destruction after that law was passed. The Biden administration is pushing a “remedy” — mortgages for relatively uncreditworthy borrowers — that has twice sown widespread devastation across the nation.
HUD’s section 235 program
In 1968, the same year that Congress banned housing discrimination, it also created a new Housing and Urban Development (HUD) program known as Section 235 to provide heavily subsidized loans for low-income families and individuals to allow them to buy homes, with special assistance for mothers on welfare. Since most Section 235 recipients had almost no equity in their homes, it was cheaper for them to abandon their house than to repair or sell it. Tens of thousands of homes were left to rot in previously stable neighborhoods. National Journal said in 1971 that the Federal Housing Administration was “financing the collapse of large residential areas of the center cities.”
Between 1970 and 1976, HUD took over 13 percent of the housing stock in Detroit — 25,000 homes — after owners abandoned the houses or defaulted. The Detroit News reported that Section 235 was turning Detroit neighborhoods into “‘ghost towns’ where a handful of families exist amid vandalized and fire-gutted homes.” Detroit City Council President Carl Levin (later a U.S. senator) castigated “Hurricane HUD.” In 1976, the Detroit Board of Assessors estimated that “HUD has cost every citizen in Detroit 20 percent on his house.”
The Chicago Tribune in 1975 denounced Section 235 for causing “the decay of hundreds of good neighborhoods…. No natural disaster on record has caused destruction on the scale of the government’s housing programs.” President Richard Nixon, surveying Section 235’s wreckage, complained in 1973: “All across America, the federal government has become the biggest slumlord in history.” Bipartisan backlashes led to the downscaling of Section 235.
But by the 1990s, the lessons of Section 235 were forgotten. Roughly 41% of black households owned their own homes in 1995, compared to over 70% of white households. The Clinton administration championed the idea that racism was to blame. HUD Secretary Andrew Cuomo declared in 1998, “We will not tolerate a continued home ownership gap as wide as the Grand Canyon that divides Americans into two societies, separate and unequal.” The Clinton administration exacted multibillion dollar penalties from mortgage companies it asserted had not made enough loans to minorities with subpar credit histories.
Bush’s compassionate conservatism
President George W. Bush seized the issue to showcase his “compassionate conservatism.” Bush proclaimed in 2002 that he would “use the mighty muscle of the federal government” to boost homeownership. Bush was determined to end the bias against people who wanted to buy a home but had no money. A White House Fact Sheet on June 17, 2002, declared that Bush’s agenda “will help tear down the barriers to homeownership that stand in the way of our nation’s African-American, Hispanic and other minority families…. The single biggest barrier to homeownership is accumulating funds for a downpayment.”
Congress passed Bush’s American Dream Downpayment Act in 2003, authorizing federal handouts to first-time homebuyers of up to $10,000 or 6% of the home’s purchase price. Bush also swayed Congress to permit the Federal Housing Administration to make no-down-payment loans to low-income Americans. Bush proclaimed: “Core American values of individuality, thrift, responsibility, and self-reliance are embodied in homeownership.” In Bush’s eyes, self-reliance was so wonderful that the government should subsidize it. Bush’s “generosity” was lavishly rewarded. “In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Bush’s reelection campaign, more than triple their contributions in 2000,” the New York Times reported.
The Government Accountability Office reported in 2010, “Non-prime mortgage originations increased dramatically from 2000 through 2006, rising from about 12 percent ($125 billion) of all mortgage originations to about 34 percent ($1 trillion).” Fannie Mae and Freddie Mac bought up bundles of subprime loans created by other companies, deadening the incentive for mortgage lenders to avoid reckless behavior. The tidal wave of subsidized lending helped send housing prices through the roof. Lawrence Lindsay, Bush’s first chief economic adviser, observed in 2008, “No one wanted to stop that bubble, It would have conflicted with the president’s own policies.”
The housing collapse
When a recession began in 2007, home values skidded and laid-off workers ceased paying mortgages. In mid-2008, Fannie and Freddie declared bankruptcy. Bush absolved himself by blaming corporate greed, declaring, “Wall Street got drunk.”
Clinton-Bush policies boosted the percentage of Americans living in their own homes to 69.2% — the highest rate on record. However, after housing prices collapsed, the rate fell to 62.9% by 2016. This is the equivalent of almost 8 million families or individuals losing or otherwise exiting their homes. This was the biggest loss of home ownership in American history, a much sharper fall than occurred during the Great Depression. Housing values have rebounded in many areas since the 2007 crash, but that is no consolation to people who lost their homes.
Because minority households had seen the fastest growth in homeownership over the prior decade, the housing collapse ravaged the net worth of black and Hispanic households. “The implosion of the subprime lending market has left a scar on the finances of black Americans — one that not only has wiped out a generation of economic progress but could leave them at a financial disadvantage for decades,” the Washington Post noted in 2012. The median net worth for Hispanic households declined by 66% between 2005 and 2009. That devastation was aptly described in a 2017 federal appeals court dissenting opinion as “wrecking ball benevolence” (quoting a 2004 Barron’s oped I wrote). “Affordable housing turned out to be the path to perdition for the U.S. mortgage market,” Federal Judge Janice Rogers Brown lamented in that court opinion. As New York Times business reporter Gretchen Morgenson and Joshua Rosner wrote in their book, Reck-less Endangerment, “homeownership was no longer the route to a secure spot in middle-class America. For millions of families, especially those in the lower economic segments of the population, borrowing to buy a home had put them squarely on the road to personal and financial ruin.”
Crony capitalism
Fannie and Freddie got away with grossly irresponsible practices for many years because they spent hundreds of millions of dollars for lobbying and campaign contributions before their collapse. The Congressional Hispanic Caucus championed low lending standards, resulting in a tidal wave of NINA “no income, no assets” and “no document” mortgages that relied solely on a borrower’s asserted income. As the Wall Street Journal reported in 2009, “At the height of the subprime lending boom, in 2005, banking and finance companies gave at least $2.3 million in campaign contributions to members of the Hispanic Caucus.” This was crony capitalism at its worst — politicians making out like bandits while much of the economy was left in shambles.
But Biden policymakers learned nothing from the housing crash. Instead, the administration blames the homeownership gap in part on unjust denial of mortgages to black applicants. But if that was actually the case, then black borrowers would have a lower default rate on mortgages because they were financially sounder than other applicants.
However, in recent years, black mortgage holders have been almost 50% more likely to default than white borrowers, according to the American Enterprise Institute. In 2021, the mortgages for black homeowners were more than twice as likely to be in forbearance than white homeowners. The same trend has prevailed for decades. A 1995 Federal Reserve Board study examined more than 200,000 mortgage loans and found that “blacks defaulted about twice as often as white borrowers.”
Biden’s housing catastrophe
The Biden push to put shaky borrowers into homes could not be happening at a worse time. Mark Calibria observed, “We are in a deflating housing market and should be careful about luring weak credit borrowers into the market at this point in the cycle.” Mortgages are especially dicey for buyers who make minimal or no down payments and who feel they have nothing to lose, especially if home values are declining.
“The ‘early-payment default’ rate which tracks mortgage delinquencies within six months of origination, has hit its highest level since 2009 [except for the pandemic] for FHA loans, which are government-backed loans typically issued to low-income Americans who would not otherwise be able to obtain a loan,” according to Black Knight, a mortgage analytics company. Inflation could also result in sharply increasing the number of defaults.
As a Wall Street Journal editorial noted, “Many high-risk borrowers brought in under the [Biden mortgage subsidy edict] will buy homes in low-income neighborhoods. The working-class families who already live in those neighborhoods worked hard and saved for their homes. If their new neighbors default and face repossession, nearby homeowners may see their property values fall.”
The new Biden penalty on creditworthy homebuyers is on par with his national moratorium on evicting deadbeat renters, food stamps policies discouraging people from getting jobs, and perpetually absolving student borrowers from paying a cent on their federal loans. These policies are not spurred by generosity. Instead, they are steps toward politicians and their appointees seizing boundless sway to determine who gets what in American life.
Giving people mortgages they can’t afford can ruin their lives. Unfortunately, politicians can reap votes and campaign contributions as long as subsidized borrowers don’t go bankrupt until after the next election. American homeowners and homebuyers will not be safe as long as politicians and government officials can whipsaw housing markets as they please.
This article was originally published in the July 2023 edition of Future of Freedom.