The Biden administration is weakening the U.S. housing market by prioritizing riskier borrowers, not based on traditional credit data, but based on a politically motivated agenda. The politics at play risk costing taxpayers who largely guarantee the U.S. mortgage market through government-sponsored enterprises such as Fannie Mae, Freddie Mac (the Enterprises), and the Federal Home Loan Banks (FHLBs).
In January, the Biden administration announced new actions related to renters and tenants in alignment with the recently released Blueprint for a Renters Bill of Rights. The announcement declared that the Federal Housing Finance Agency (FHFA), which regulates the Enterprises and the FHLBs, will “launch a new public process to examine proposed actions promoting renter protections and limits on egregious rent increases for future investments,” and “increase affordability in the multifamily rental market by establishing requirements that encourage the financing of multifamily loans that guarantee affordable housing.” While this may sound nice in theory, it is flawed policy.
These two initiatives conflict. On the one hand the Enterprises will purchase riskier mortgages to “increase affordability in the multifamily rental market,” which will be more likely to default, and on the other hand the Enterprises will prevent property owners from using their powers of eviction and the right to increase rent to service mortgage payments. Property owners with mortgages owned by the Enterprises may be forced to take on tenants more likely to default without the ability to raise the tenants’ rent or evict them if they fail to pay on time or at all. This is a Catch-22 that squeezes property owners and puts the taxpayer-backed Enterprises in a financially precarious position. Taxpayers would be forced to cover the losses.
The likelihood of mortgage defaults is rising. Recent reports show that the delinquency rate for mortgages is increasing due to a rise in interest rates. Last year, “mortgage delinquency rates rose to a seasonally adjusted rate of 3.96% in the fourth quarter, up 51 basis points from the third quarter.” Combining this with the fact that the U.S. Treasury owns rights to acquire about 80% of the Enterprises common stock, it is clear that this policy will be an incredible risk for the average taxpayer.
The best way to relieve taxpayers from the risk of losses on defaulting or delinquent mortgages is to release the Enterprises from conservatorship. When the FHFA announced it was placing the Enterprises under conservatorship after the Great Recession, it was always understood that this would be temporary to stabilize the mortgage market. That was 15 years ago. Today, the Enterprises remain in a zombie-like state implementing the political and social agendas mandated by the FHFA.
To make matters even worse, the FHFA issued a Request for Input (RFI) on the Enterprises’ social bond policy. According to the FHFA’s website:
This RFI will help FHFA understand the opportunities and potential risks associated with the Enterprises issuing single-family social bonds, under the framework of Environmental, Social, and Governance (ESG) securities.
The FHFA plans to prioritize non-pecuniary ESG standards instead of reliable credit data. It goes without saying that this policy could increase significant risk for the Enterprises and therefore for the taxpayers.
FHFA is piling on more risk that the Enterprises will be forced to absorb because they will now have to consider two credit score models when purchasing a mortgage. While this makes it easier for lenders to offload mortgages, as previously noted at ATR, the Enterprises recent switch to the two-credit score model will weaken the Enterprises’ reliance on traditional credit score data. The new adoption of two credit scores has been estimated to cost the taxpayer about $600 million.
Additionally, last fall, FHFA had announced it would eliminate upfront fees for certain first-time borrowers, and coming up on May 1st, the Enterprises, at the direction of FHFA, will be modifying their loan-level price adjustments (LLPAs) in a way that will benefit riskier borrowers while increasing rates on borrowers with higher credit scores. These actions are a redistribution of wealth to individuals that may not be able to make mortgage payments on time.
As long as the Enterprises remain in conservatorship, these policy changes will subject taxpayers to riskier mortgages and force them to cover losses in the event of defaults.
In the wake of the recent banking crisis, the FHLBs have been advancing billions of dollars to lenders in return for mortgage collateral. The FHLB system is regulated by the FHFA and like the Enterprises “are perceived to have implicit backing from the government.” If the FHLBs are also forced by FHFA to adopt looser standards or provide advances for riskier mortgages they could find themselves in dire financial straits. But because “the U.S. Treasury is authorized to purchase up to $4 billion of FHLB System debt securities,” this allows the FHLBs to rest on a taxpayer-funded backstop. This government guarantee could encourage the FHLBs to make riskier advances. This is evidenced by the billions of dollars advanced to the now defunct Silvergate Bank, Silicon Valley Bank, and Signature Bank.
To add insult to injury, this month the Department of Housing and Urban Development (HUD) released a rule that applies an unreasonable standard to property owners and lenders. The rule makes it significantly easier for borrowers or renters to challenge and win in litigation if a property owner or lenders’ policies cause “unequal outcomes for a protected class, regardless of intent.” The Wall Street Journal Editorial Board points out that “lending to too few minorities could invite litigation, even if credit worthiness and not race is the reason for the deficit.”
Biden’s housing regulators are enfeebling the mortgage market. Congress should make note of the heightened risk and potential cost to taxpayers. More risk and greater political shenanigans are the last thing the U.S. housing market needs as lending tightens, interest rates continue to rise, and the economy contracts.