By William L. Anderson for the Mises Institute | May 15, 20203
In the summer of 2020, the Smithsonian Institution created a chart meant to condemn what it calls “whiteness,” and it listed a number of characteristics it claimed were essential to “white culture.” Among the so-called characteristics it described in pejorative terms was delaying gratification, or saving for the future, what Austrian economists would call low time preference.
The chart, which was withdrawn after widespread protest, sought to identify the characteristics needed to build not only an economy but civilization itself with a racist culture. Thus, the kind of lifestyle and values that might culminate in someone having high credit scores and saving up for a significant down payment for a house were something not to be emulated or praised, but rather to be called out and declared shameful.
Although the chart no longer is found on the Smithsonian website, the mentality that created it lives on in the policies of the Biden administration. To show its commitment to equity—equal outcomes—the Federal Housing Finance Agency (FHFA) implemented a new policy on May 1, 2023, that punishes homebuyers with high credit scores who can put down at least 15–20 percent on a mortgage by making them pay higher interest rates and extra fees. Declares a Wall Street Journal editorial:
According to calculations by Evercore ISI, buyers with strong credit scores between 720 and 739 who make 15%–20% down payments will see their rates increase by 0.750%. Borrowers who put down 20%–25% will see rates increase by 0.500%.
The winners are borrowers with weak credit scores—that is, riskier borrowers. Under current FHFA policy, a borrower with a weak credit score below 620, who is borrowing more than 95% of the value of their home, pays 3.750%. Under Ms. Thompson’s new plan, those borrowers will see their fees decrease by 1.750%.
Not surprisingly, commentators like James Bovard have rightly attacked this policy as one that imposes perverse incentives, turning the rewards for creditworthiness upside down. Bovard writes:
Starting May 1, The Post exposed last week, a Biden administration decree will require adjusting mortgage calculations to penalize homebuyers with a FICO credit score of 680 and above—almost two-thirds of the population.
This levy will be used to reduce costs for people with low credit scores—i.e., risky borrowers more likely to default on mortgages.
However, this is not merely another version of the Law of Unintended Consequences, in which well-meaning government officials implement a policy without looking at the so-called bigger picture. The consequences here are intended. The Biden administration officials know full well the implications of this new policy and is sending the message that the notion of creditworthiness itself is implicitly racist.
As Newsweek points out, the racial gaps in home ownership and credit scores are significant:
Only about 25 percent of homebuyers with Federal Housing Administration loans are people of color, according to the White House. Black and Hispanic people, on average, have fewer savings to use as a down payment on a home and tend to have lower credit scores, according to David Stevens, former CEO of the Mortgage Bankers Association (MBA) and a former FHA commissioner during the Obama administration. The current policy is being rolled out by the FHFA.
He told Newsweek that this can be attributed to factors like distrust in the banking system or being a first-generation American. He added that low credit scores can be a significant barrier to homeownership.
But in order for the FHFA to close the gap by bringing down LLPAs [loan-level price adjustments] for those borrowers, the agency will compensate for the reduction in borrowing fees by raising the LLPAs of borrowers with higher credit scores, who tend to be white.
The average credit score in white communities was 727 in 2021, compared with 667 in Hispanic communities and 627 in Black communities, according to data analyzed by FinMasters, a personal finance blog.
Not surprisingly, the Biden administration blames the homeownership gap on racism, so its proclivity is to punish the people who saved their income and engaged in forward-looking behavior, something the Smithsonian condemned as a product of “whiteness.” However, as Bovard points out, black homeownership rates relative to white rates are lower today than they were more than fifty years ago: “Federal Housing Finance Agency Director Sandra Thompson testified to Congress last year that the racial homeownership gap ‘is higher today than when the Fair Housing Act [of 1968] was passed.’”
That is hardly insignificant. In 1968, the United States was just beginning to shed Jim Crow laws, and prospective black homeowners had far fewer financing opportunities than they do today. Furthermore, homebuyers were expected to put at least 20 percent down, with only some exceptions, so one might consider lending policies at that time to have been far less friendly to black borrowers than they are today.
Furthermore, the Bill Clinton, George W. Bush, and Barack Obama administrations had policies explicitly aimed at increasing homeownership among blacks and other minority groups. Bush claimed his administration had put a record number of black Americans in their own homes by helping to provide down payments and lowering interest rates, among other policies.
Andrew Cuomo, the Clinton administration’s housing and urban development secretary, declared that the homeowning gap between blacks and whites was due to discrimination and ordered mortgage lenders to lower lending barriers for black households. Cuomo wrote:
The American Dream of homeownership is not reserved for whites. We will not tolerate a continued homeownership gap as wide as the Grand Canyon that divides Americans into two societies, separate and unequal. Eliminating housing and lending discrimination is vital to making the opportunity for homeownership a reality for all Americans.
Of course, the Bush administration’s all-out push to increase black and Hispanic homeownership rates had its own unhappy ending: the 2008 financial meltdown. All the Bush administration’s efforts to increase minority home ownership blew up as home prices plunged and many homeowners defaulted on their mortgages and lost their homes. Writes Bovard: “Thanks to the housing crash, the median net worth for Hispanic households declined by 66 percent between 2005 and 2009 and the median net worth of black households declined by 53 percent.”
Moreover, in a 2004 article in Barron’s, Bovard warned that the Bush housing policies were going to have an unhappy ending:
One of the proudest elements of President Bush’s “compassionate conservative” agenda has been government financial support to home buyers for down payments. Bush is determined to end the bias against people who want to buy a home but don’t have any money. But he is exposing taxpayers to tens of billions of dollars of possible losses, luring thousands of moderate-income families into bankruptcy, and risking the destruction of entire neighborhoods.
Bovard’s words were prophetic. But at least Bush didn’t blame borrowers with high credit scores and large down payments for the racial housing gaps.
The Biden administration, on the other hand, has expanded the definition of “intersectionality” to include the claim that whites (along with non-whites who have high credit scores) are to blame for minorities’ low credit scores and shakier finances. The Biden administration’s policies continue what Bovard called “wrecking ball benevolence.” Former federal Judge Janice Rogers Brown concurred, writing: “Whether the road was paved with good intentions or greased by greed and indifference, affordable housing turned out to be the path to perdition for the U.S. mortgage market.”
Economically, none of this makes sense, but one must understand that the Biden administration is not looking to promote working markets in housing. Instead, it is claiming that the only cause of the gap in homeownership between blacks and whites is white racism and that the government must engage in extraordinary means to eliminate this gap, even if this requires turning economic logic upside down.
One does not have to be a seer or have a doctorate in economics to know that this latest iteration of federal housing policy will end in failure just like all the other housing initiatives for minorities. But don’t blame the Law of Unintended Consequences. This new policy is deliberate, and when it fails (as it surely will), look for Biden or whoever else is in the White House to call for even more drastic measures.
William L. Anderson is a professor emeritus of economics at Frostburg State University in Frostburg, Maryland. He currently works as an editor for the Mises Institute.