By: Noah Rothman – nationalreview.com – April 20, 2023

It’s difficult to understate the perverse incentives that penalizing homebuyers with good credit will create.

The fallout from the 2008 implosion of the mortgage market was still settling over the American economic landscape in mid February 2009, when Barack Obama’s party passed a massive $787 billion stimulus designed, ostensibly, to staunch the bleeding. Not long after that, the president announced plans to spend $75 billion — $25 billion more than initially advertised — to support monthly mortgage payments for distressed homeowners and forestall a wave of foreclosures. This, treasury secretary Timothy Geithner said, would help shore up the nation’s teetering banking system, keep interest rates low, and prop up the value of America’s housing market. CNBC business reporter Rick Santelli was not convinced.

“The government is promoting bad behavior,” he famously boomed from the floor of the Chicago Mercantile Exchange. “Do we really want to subsidize the losers’ mortgages?” he asked the traders by whom he was surrounded. “This is America! How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” A chorus of boos erupted from the floor. Santelli joked about harnessing the anger he’d channeled into a “Chicago tea party,” but conservatives took him literally, creating the populist movement that fueled a Republican resurgence.

Though the moral hazard Santelli raged against was real enough in 2009, so, too, was the threat to the macroeconomy represented by the subprime-mortgage crisis. In 2023, those conditions are no longer present, but the Biden White House is acting like they are.

Once again, the administration is prepared to “subsidize the losers’ mortgages,” so to speak, and not in any effort to save the economy or help Americans avoid destitution. The Biden administration’s only goal is to purchase the loyalty of prospective homebuyers who are locked out of the property market by high real-estate prices and rising interest rates — rising interest rates necessitated, in part, by the administration’s reckless spending. And Americans who did everything right are going to suffer, perversely enough, because they did everything right.

The administration is set to enforce a new rule that will compel potential homebuyers who spent their lives paying their bills on time and building good credit scores to pay more for their mortgages. Why? To subsidize the loans assumed by higher-risk borrowers. Beginning May 1, prospective homeowners with a credit rating of 680 or more “will pay, for example, about $40 per month more on a home loan of $400,000,” the Washington Times reported this week. “Homebuyers who make down payments of 15% to 20% will get socked with the largest fees.”

Federal Housing Finance Agency director Sandra Thompson tried to reassure borrowers that there would be “minimal” fee changes associated with the increased “pricing support for purchase borrowers limited by income or by wealth.” That is cold comfort to the loan officers who expressed their exasperation over this distortion of the real-estate market at a time when low inventory, excess demand, and high borrowing costs have combined to produce a substantial shortage of affordable housing.

Those conditions will be exacerbated in August, when the FHFA is set to impose a new upfront fee on certain borrowers with a debt-to-income ratio over 40 percent, which one financial-services consultant said was also designed to hurt “better credit quality borrowers” to “subsidize the fee reductions for lesser credit borrowers.”

It’s difficult to understate the perverse incentives this act of bribery will encourage. You’ve spent your adult life borrowing responsibly and paying your bills on time. You’ve saved for years to acquire enough money for a down payment on a home that approaches the rate at which you can avoid a Federal Housing Administration–subsidized loan and the premium it imposes on your mortgage insurance. For all your diligence and hard work, the Biden administration will now punish you only so that consumers who were not similarly conscientious can have access to better mortgage rates and lower down payments. Knowing that, why on earth would you devote yourself to an unrewarding enterprise like thrift when someone, somewhere will foot your bill regardless?

Even more grotesque is the fact that this political payoff to what Democrats regard as core constituencies is designed to mitigate the effects of an orgy of spending that was itself little more than a political payoff to core Democratic constituencies.

In January, the publication Clever Real Estate surveyed millennials looking to purchase a home and found that over 90 percent of those polled said inflation had become an obstacle to buying a home, eclipsing buyer competition. Nearly half cited high interest rates as their primary concern, and a quarter of prospective homebuyers had put off purchasing property. The stress associated with saving to purchase a home in this environment led more than half the millennials surveyed to confess that they were “reduced to tears” by the process.

The interest rates that dissolved these young adults into puddles of anxiety were rendered necessary not just by the cash the federal government hemorrhaged as a response to Covid but also by the Democratic Party’s effort to use Covid as cover in pursuit of more parochial goals.

The party in power spent billions of taxpayer dollars bailing out union pension funds, backstopping the budgets of Planned Parenthood and the National Endowment for the Humanities, and helping profligate municipalities like San Francisco bridge their budget gaps. It spent over a trillion on “infrastructure,” which provided a “tremendous boost” to the law firms that represent developers, lenders, investors, environmental-impact specialists, and private-equity funds. It subsidized billions in child-care costs for Americans struggling through school closures at the tail end of the Covid pandemic, which it had encouraged by allowing recalcitrant teachers’ unions to set the bar for what constitutes a “safe” reopening inordinately high. And when all this spending overheated the economy, the party passed the “biggest piece of climate legislation in history” under the assumption that the cure for the ills of too much spending was even more spending.

Now, as the Fed seeks to raise the costs of borrowing and restore price stability, the consequences of the Democrats’ spending binge are being felt most acutely by a demographic that disproportionately votes Democratic. So, what do Democrats do? Complicate the Fed’s work further and make it illogical to devote yourself to sound financial habits.

It is a profound irony that the supposedly populist iteration of the GOP is not nearly as well positioned to take advantage of this catalyst for a populist revolt as the GOP of 2009 was. Maybe Republicans can summon the enthusiasm to craft and sustain a messaging campaign against this attack on personal responsibility; after all, they’ve done it before. But if they can’t take this ball and run with it, they should get off the field.

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Source: Mortgage Subsidizing: Democrats’ Atrocious Attack on Personal Responsibility | National Review