Biden Uses Credit Scores to Punish Americans

Blog Articles · May 2, 2023 · Regulation

In yet another example of gross overreach and unilateral decision-making, the Biden administration is now taking aim at financially responsible homebuyers. While inflation and the national debt take money from the pockets of taxpayers, President Biden wants to add fuel to this fire by forcing responsible Americans with low-risk credit scores to subsidize lower rates for high-risk borrowers.

Without an opportunity for public comments and interested stakeholder input, the Federal Housing Finance Agency (FHFA) announced “updates” to Fannie Mae’s and Freddie Mac’s loan-level price adjustments (LLPAs) for new mortgages - effective May 1, 2023.

Under this new LLPA fee structure, a responsible homebuyer with a credit score of 740 and a 15%-20% down payment will face an upfront 1% surcharge—a jump from just 0.25% previously. On top of that, when that same buyer enters a long-term mortgage, their rate increases nearly a quarter percentage point from the previous structure. All in: on a $400,000 loan, the change means an increase of $3,000 in closing costs. If financed over 30 years at a 6% mortgage rate, that buyer could see an $18 increase to their monthly payment, amounting to $10,800 over the life of that loan.

Meanwhile, homebuyers with credit scores of 679 or lower will see their fees reduced and more favorable mortgage rates. A buyer with a credit score of 620 and a 5% down payment would have their fees reduced by up to 45% from the previous structure. All in: that buyer, with a 30-year mortgage, could see a $100 decrease in their monthly payment, amounting to a reduction of $36,000 over the life of that loan.

Let’s call this what it is: a redistributive tax on responsible, hard-working Americans. Having good credit does not signify that one is even wealthy, simply that one repays debts—even small ones—on a timely basis. According to the National Association of Realtors, 26% of all home buyers in 2022 were first-time home buyers, an all-time low since data collection began in 1981. At a time when the American dream of home ownership is slipping away from young Americans, Biden is increasing costs for responsible buyers.

These costs are in addition to the higher interest rates buyers are paying because of the high-inflation policies Biden signed into law. All of the “free money” pumped into the economy raised home prices first and then raised interest rates for borrowing. Now, Biden is going for the trifecta of unaffordability by raising a new tax.

But it gets worse— this new fee structure will also drive up housing prices further—especially in the lower priced housing segment. These changes will artificially increase demand in this segment by expanding mortgage financing to credit-impaired borrowers. Home inflation for the low price tier of nearly 46% since March 2019 has dwarfed the 37% in the higher market value segment. Middle-class families seeking their first home or to upsize due to growing families already feel the financial pressure of rising interest rates and home prices. The new LLPA fee structure will force them to both pay more for their next home along with higher financing charges.

FHFA Director Sandra Thompson noted, “[The changes are] taking another step to ensure that the Enterprises advance their mission of facilitating equitable and sustainable access to homeownership.”​​ It is clear these changes are misguided and both conflate equity with equality and good credit scores with wealth. The LLPA changes advance a harmful and inaccurate narrative about hard working, financially responsible citizens in the low-income bracket. FHFA should prioritize the interests of all American citizens and foster an environment that rewards responsible financial behavior.