Rewarding Bad Credit Is Dangerous
A new rule went into force on May 1: Borrowers with lower credit will get access to better mortgage rates. The catch: People with good credit will pay for it.
Fannie Mae and Freddie Mac have changed their loan-level price adjustments, or the fees they charge mortgage borrowers.
“It’s unprecedented,” said David Stevens, who was the Federal Housing Administration commissioner during the Obama administration. “My e-mail is full from mortgage companies and ceos [telling] me how unbelievably shocked they are by this move.”
Someone with a $400,000 loan at a 6 percent mortgage rate would pay an extra $40 a month, according to Stevens’s estimate.
This is bad news on so many levels. “It’s going to be a challenge trying to explain to somebody that says, ‘I worked my whole life for high credit and I’ve put a lot of money down and you’re telling me that’s a negative now?’ That’s a hard conversation to have,” the New York Post wrote, quoting an anonymous mortgage loan originator.
It also shows the power of America’s unelected bureaucracy. This is a change that will affect millions of people, and no one voted for it. The bureaucracy controls so much of the economy it can just decide to make this change.
And it is exactly this kind of incentivizing of bad credit that caused the 2008 financial crisis in the first place.
In the early 1990s, left-wing activists decided that offering mortgages based on credit history was racist. A 1992 Federal Reserve Board study found that blacks were twice as likely as whites to be denied mortgages. The solution? The government “enforced sweeping policies designed to arm-twist banks into making loans available to practically anyone—even those with horrible credit ratings,” Trumpet executive editor Stephen Flurry wrote in 2009.
Fannie Mae tried to make trillions available to those struggling to afford a home. The flood of money pushed prices high and caused a bubble in the housing market. Banks resorted to more and more creative accounting practices to enable them to keep dishing out “sub-prime” loans. And in 2008, it all exploded.
The latest change is probably not big enough to trigger a similar explosion by itself. But it shows we’ve learned nothing from the 2008 crisis.
“This is the socialization of risk, and it flies against every rational economic model, while encouraging housing market dysfunction and putting taxpayers at risk for higher default rates,” wrote the Wall Street Journal.
When United States regulators reward poor behavior, like not repaying debts on time, you know something is badly wrong with the economy.
In January 1920, with the U.S. economy in full boom, statistician Roger Babson forecast “the worst business depression that our generation has ever experienced.” By the end of the year, he was proved right. How did he predict it?
“When you want to know the temperature in the room, now, you look at the thermometer on the wall,” said Babson. “But if you want to know what the temperature will be an hour or two from now, the thermometer can’t tell you. You go down to the boiler room or consult the U.S. weather prophet.”
To forecast the economy, he said, “I looked at the way people as a whole were dealing with one another. I looked to the source which determines future conditions. I have found that that source may be defined in terms of ‘righteousness.’”
How are investors dealing with each other? Is it “righteous” behavior? Or unrighteous? It’s a profound observation from a statistician.
If people are cheating or behaving irresponsibly, that’s a bad sign for the future economy. But now we have a government encouraging irresponsibility. That’s even worse.
Psalm 37:21 says, “The wicked borrows, and cannot pay back, but the righteous is generous and gives” (Revised Standard Version). There is a clear moral dimension to what the Biden administration is encouraging. The fact that America’s economic bureaucrats have no problem pushing immoral behavior is very dangerous.
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