The Biden Administration’s plan to tax people with good credit scores in order to lower home buying costs for people with bad credit scores may come with perverse or unintended consequences, like a higher rate of defaults, degraded home values, or a disproportionate burden on Asian-Americans.
Under the plan, mortgage applicants will pay a surcharge if they have good credit.
That money will then be used to lower costs for people with bad credit.
It’s like Robin Hood has come to the American mortgage industry.
The Federal Housing Finance Authority has advanced the plan in the name of equity, the idea being that pricing adjustments will help traditionally marginalized communities, like African-Americans and first generation immigrants, purchase homes.
But the plan has the potential to have negative consequences that outweigh the potential benefits.
Some analysts have said the plan will have a disparate impact on Asian-Americans, who tend to have higher credit scores than most Americans.
Others say the plan could lead to a higher rate of defaults by encouraging high-risk borrowers to take on mortgage debt they may not be able to afford.
Over the medium term, a surge in high-risk borrowers defaulting on home loans could undermine property values for people who already own homes in neighborhoods where new buyers are likely to locate.
The new fees will be levied through the Federal Housing Finance Agency’s introduction of loan-level price adjustments (LLPAs). These will be enacted by Fannie Mae and Freddie Mac, affecting mortgages originating at private banks across the US.
Homebuyers with credit scores of 680 or higher will pay around $40 more per month on a $400,000 home loan. Homebuyers who make down payments of 15% to 20% will face the largest fees. The new fees will only apply to Americans buying houses or refinancing after May 1.
The new rule inverts the typical use of credit scores in free market economies.
Historically, those with good credit scores could expect to pay less for debt because financial institutions consider lending to them less risky.
