Even as the second, third, and fourth largest bank failures in U.S. history have unnerved financial markets in the past two months, the Biden administration keeps adding more stressors to the mix.
Two new stressors come courtesy of the Federal Housing Finance Authority. One is already receiving copious criticism, but the other, more technical one has gone largely unnoticed. Both are misguided and should be reversed – along with a plethora of other regulatory and executive actions that are endangering the national economy.
TIM SCOTT SLAMS BIDEN FOR PUNISHING PEOPLE WHO HAVE GOOD CREDIT SCORES
To be clear, the FHFA actions certainly did not cause the collapse of First Republic Bank, Silicon Valley Bank, or Signature Bank. The bank failures do, however, show that the banking sector has been significantly weakened by Biden’s high inflation and interest rates. Banks, therefore, are ever more at risk from any other new burdens, however small those burdens may seem.
The first FHFA issue, the one which critics have made a lot of righteous noise about, is the imposition of higher fees on homeowners (or buyers) with good credit scores and high down payments in order to allow lower fees for owners with riskier ratings and lower down payments. On its face, it is unfair, not to mention a perversion of ordinary incentives, to punish people who have earned good credit scores while encouraging more borrowing by people with poor payment records. Practically speaking, it also is likely to result in more foreclosures as more perilous loans get made, plus a decline in home values as buyers with good credit must set aside more money to pay the fees, leaving less for the actual purchase.
The second FHFA issue is more technical and less sweeping, but its results could similarly add to systemic risk. Without explanation, the agency last October mentioned in passing that Fannie Mae and Freddie Mac will look only to the combined credit rating from two of the three major credit rating agencies rather than from all three. In March, FHFA invited comment not on whether to implement this change from “tri-merge” reports to “bi-merge,” but only on how.
Why does this matter? Well, the reason for requiring a combination of reports from all three agencies is that some credit analyses miss “red flags.” The more information available to the lender, the less chance the lender will miss a warning sign that a buyer is unlikely to meet his or her obligations. This is especially important for lenders securing guarantees from Fannie and Freddie, which were created specifically to encourage home purchases with smaller down payments — meaning, of course, dicier loans.
Most analysts agree that Fannie and Freddie’s excessively risky loan behaviors were a significant cause of the horrible financial crisis of 2008. By moving from tri-merge reports to bi-merge, the FHFA will make it more likely that Fannie and Freddie, lacking relevant information, make more bad loans.
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As it is, small businesses across the country are already feeling pressure due to recent bank failures and higher interest rates. This is a time to increase safety, not to subsidize risk. The Biden administration, through these two new FHFA policies and through $400 billion in subsidies for bad student loans — along with its profligate spending and higher federal debt, of course — is adding burdens and risks to the whole economic system.
There is nothing wrong with banks using alternative information to determine creditworthiness. There is, however, everything wrong with using less information, while actually rewarding bad credit at the expense of good. By doing both of the latter things at the same time, the Biden administration pushes banks, and the banking system, closer to crisis.