May 9, 2023
Perhaps you have already heard about the latest welfare gimmick from team Biden: the great shift in loan costs from high-risk borrowers to low-risk borrowers. Effective May 1, 2023, the Federal Housing Finance Agency (FHFA) approved a new schedule of upfront fees to be charged by two of its regulated entities, Fannie Mae and Freddie Mac.
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In the table below, which pertains to home mortgage loans, the “X” axis shows the size of the down payment, with the amount getting smaller as we move from left to right. The “Y” axis shows the borrower’s credit score, with the top representing high credit scores and the bottom representing low scores.
Table by Joe Fried
Everyone fitting into the column to the very far right is a relatively high-risk borrower because of the extremely small down payment. And that is even true for people with good credit scores. It is important to remember that almost anyone who has lots of credit cards, and pays them down on time, will have a good credit score — even if his or her savings are practically nonexistent.
People with low credit scores, such as those in the bottom four rows of the table, are also relatively high-risk borrowers.
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In the Biden Inverse Universe, the high-risk borrowers get the fee reductions (shown in green), and the people with good credit and reasonably large down payments have to pay more (shown in red).
If you think these fee shifts were inadvertent (which is the official line of the FHFA), then consider these recent developments from this agency, which is supposed to be protecting the financial health of Fannie and Freddie:
- The FHFA issued a Notice of Proposed Rulemaking on April 19, 2023, and it would require Fannie and Freddie to employ various means to better assist “underserved communities.” Those communities are defined by FHFA in meticulous detail. Just imagine the data collection, administrative, and reporting nightmare that would be produced by dividing the borrowing population into these finely distinguished racial and ethnic subcategories:
- Blacks, segmented by specific cities, such as Minneapolis
- Latinos, including specific ethnicities like Mexican and Puerto Rican
- Asians, segmented as Korean, Nepalese, Filipino, Vietnamese, etc.
- Native Hawaiians, including specific ethnicities like Chamorro
- Pacific Islanders, segmented by specific ethnicities like Samoan
- Tribal land dwellers, including American Indians and Alaska Natives
- People with mobility disabilities
- Lesbian, gay, bisexual, transgender, and queer people
- Same-sex couples
- Household occupants with limited English
It seems that the FHFA is more interested in sociology and ethnic studies than the maintenance of a healthy financial lending system. Let’s remember that the express purpose of the FHFA is supposed to be to:
Ensure the regulated entities fulfill their mission by operating in a safe and sound manner to serve as a reliable source of liquidity and funding for the housing finance market…
- In October 2022, the FHFA announced its intention to eliminate certain product fees altogether for first time homebuyers who are at or below the median area income level. Does that help Fannie and Freddie to become a “reliable source of liquidity and funding”?
- With regard to “HomeReady” loans, FHFA’s new Selling Guide states: “The borrower is no longer required to contribute at least 3% of their own funds when sweat equity is used towards the down payment on a one-unit property.” Sweat equity is generally home improvement labor provided by a nonprofit organization — not by the borrower. Will the new homeowner care about a property into which he puts no personal effort or funds?
Are we repeating the mistakes that led to the Great Recession?
These new policies bring back memories from when I audited mortgage companies several years ago. As a public auditor, I would visit our two or three mortgage company clients at least once per year to perform audits of their financial statements. In the early 1990s their revenues were lackluster, at best. But, as the 1990s advanced, the revenue for each of our clients improved dramatically. Eventually, it became obvious why business was booming: HUD loan approval standards were getting easier and easier to meet, and our mortgage clients had HUD’s approval to issue numerous subprime loans.
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After the 2007-2008 crisis I wrote a book that is one of the very few that addresses all the causes of the crisis. Our economic woes did not begin in 2002 or 2003 with the big banks, although they were irresponsibly packaging junk loans into securities. The problems started much earlier, with the creation of millions of junk loans. The credit for those loans belongs mostly to our federal government.
On his way out the door, George H. Bush signed the Housing and Community Development Act of 1992, which required that 30 percent or more of Fannie’s and Freddie’s loan purchases be related to affordable housing. That was just a starting point. HUD (the primary regulator of Fannie and Freddie prior to FHFA) was given the authority to set new requirements, and it did so with vigor. By 1996 the standard was 40 percent, and in 1997 it was 42 percent. Eventually, it became 56 percent.
The truly big change, however, was HUD’s creation of a document called “The National Homeownership Strategy: Partners in the American Dream.” That document, created by HUD Secretary Henry Cisneros, did not merely apply to Fannie and Freddie. It was a broad plan that pertained to the entire lending industry, both governmental and private. It comprised “100 proposed action items,” designed to create up to eight million new homeowners. In reality, this plan was the genesis of subprime loan crisis, which led to the Great Recession. More specifically, it was where America learned:
- It is okay to have loans with zero down payments. Those are the loans that make homeowners behave like tenants. As soon as there is a decline in home values, they move out and buy a similar house for less money.
- It is okay for nonprofit and local governments to give “silent second” loans. They are called “silent” because the primary lender is not told about these secondary loans, which are issued to cover the down payment on the primary mortgage loan. Believe it or not, those acts of mortgage fraud were endorsed in writing by the Neighborhood Reinvestment Corporation, a national nonprofit corporation created and funded by the U.S. government. The federal government is still pushing silent second loans.
- It is okay to appraise a house without even leaving your car. Those were called, “windshield” appraisals.
HUD’s efforts were not limited to FHA loans for modestly-priced homes, and Fannie’s and Freddie’s efforts were not limited to the loans they were legally able to buy. HUD was pushing borrower-friendly lending standards on hundreds of state and local governments and on “thousands of national, state, and local organizations in the private and public sector.”
On page 89 of a work by Cynthia Koller, you will find this quotation from a mortgage lender. It sums up the mess that took place in the 1990s:
For the most part, [subprime lending] originated with the Clinton Administration. I remember seeing this in the paper all the time, when the government was screaming, “we want programs available to more people who can’t get a conventional, fixed-rate loan because they don’t have the down payment…” (emphasis added).
Back in those days, HUD was the main instigator of subprime lending. Now, the FHFA is taking its turn.
Joe Fried is an Ohio-based CPA who has performed and reviewed hundreds of certified financial audits. He is the author of the new book, Debunked? An auditor reviews the 2020 election — and the lessons learned (Republic Book Publishers, 2022). It explains why the certifications of six swing state elections were premature.
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