Mortgages, Good Credit, Bad Credit, Biden/Politics, and Race
If that isn’t the worst title, I’ve ever come up it has to be close.
A couple of weekends ago, I saw some people Tweeting about a mortgage policy change coming through the Federal Housing Finance Agency (FHFA). Don’t feel bad if you’ve never heard of it. It didn’t ring a bell for me either, and I’ve been blogging here for 17 years.
Before I get too far into this, I will say that I’ve read several articles on the topic and will explain it as best I can in layperson’s terms. I may miss a little nuance here or there. However, if you want to read something more polished, I’ve included a link to a Snopes article near the end. The last thing you want to read today is a word soup about mortgages and loan-level matrices, right?
So with that out of the way, the news that was going around this weekend is about mortgages and loan level matrices.
Mortgages: Good Credit vs. Bad Credit
Specifically, the FHFA creates Loan Level Price Adjustments (LLPA) for Fannie Mae and Freddie Mac, who do the majority of new mortgages. These price adjustments change the mortgage rates depending on the borrower’s conditions. If a borrower has good credit and puts more money down, they get a better mortgage rate. If they have bad credit and put less money down, they have to pay a higher mortgage rate.
This isn’t news. The system has worked this way for decades.
The news is that the matrices give less of a benefit to those with good credit scores and less of a penalty to those with bad credit scores. It’s still helpful to have good credit and harmful to have bad credit. It’s just not as beneficial or as harmful as before.
The news I saw on social media was delivered with headlines like “Biden Raises Costs for Homebuyers With Good Credit to Help Risky Borrowers” (Newsweek’s headline). It’s worth pointing out that Biden doesn’t run the FHFA. The same people who say he’s senile want to claim he’s playing fourth-dimensional chess in reworking the LLPA matrices for the FHFA.
There’s a kernel of truth to it, though. Biden nominated the FHFA Director, Sandra Thompson, and her leadership was confirmed by the U.S. Senate – a group of people who are not named Biden. According to her bio, since 2013, she has been the Deputy Director of the Division of Housing Mission and Goal?s which is very closely related to the FHFA. Before that, she worked at the Federal Deposit Insurance Corporation (FDIC) for 23 years. Many of you are familiar with FDIC as it helps insure bank deposits.
There are two important points there. First, there IS a political aspect to the process. Biden and the Senate majority are Democrats. It seems safe to say that Republicans wouldn’t have nominated and confirmed her. Second, and most important in my mind, there’s no doubt that she’s qualified for the job. If the position weren’t politically nominated, it would be reasonable to presume that she would have been a leader to get the job based on merit and experience.
I quickly noticed that EVERY media organization covering this news usually writes with a heavy Republican slant. Much of the coverage comes from Fox News, The NY Post, or the Wall Street Journal – all owned by Rupert Murdock.
When you pull back the layers and use an unbiased fact-checking source like this Snopes article you find that Biden isn’t really connected:
“Rumors that U.S. President Joe Biden was pushing for, or had introduced, these changes were not supported by evidence. Moreover, the White House rejected that claim. There was no congressional measure or executive order related to the changes, and, based on our research, Biden had not publicly commented on the FHFA’s decision to change the fee structure.”
None of the Republican articles mention race’s role in credit scores.
It’s been extensively documented that credit scores have a racial bias. For example, Investopedia has credit scores by race. The average white person’s score is 734. The average black person’s score is 677. In the previous matrix, that would mean that the average black person paid 2% more on their mortgage (on a loan with an 80% loan-to-value ratio). Now it is a little more than half a percent.
The political articles really focus on Biden and the good credit vs. bad credit. That pushes the narrative that Biden is doing something wrong. It doesn’t explain that Sandra Thompson is a perfect fit for the job and is awesomely qualified.
I went back to look up a little more about Sandra Thompson’s nomination and found this interesting article. It specifically points out that one of the Democrat’s goals is to close the racial homeownership gap. One stunning statistic:
“There was a 30-point gap between white and Black homeownership rates in 2017, compared to 27 points in 1960, according to the Urban Institute.”
That doesn’t seem right or fair, does it? It’s not just chance that black homeownership is so much lower. It’s not chance that the credit scores are lower.
When I look at this news, I think, “If credit scores are so unperfect, maybe it makes sense to deemphasize their role in mortgage rates.” Again, good credit still matters, but it seems the right thing to do to make it matter less.
This became a complicated article to write. I like dealing with just credit scores and money, but the politics and race aspects are essential to recognize too. It’s also much easier when I’m just explaining my financial journey.
What do think? Let me know in the comments.