It was probably inevitable that the Biden Administration would enlist housing giants
to advance its woke agenda, and now it has. Last week the government-sponsored enterprises released plans to promote housing “equity” that are chock-full of race-based subsidies.
Fannie and Freddie have been under federal conservatorship since Treasury rescued them during the housing meltdown with a $190 billion taxpayer bailout. The Federal Housing Finance Agency (FHFA) has since regulated their capital, liquidity and underwriting, as well as the mortgages they can acquire. Trump FHFA director
kept the monsters on a tight leash, but there was always a risk that a future Administration would ease up and politicize home lending again. That day has come.
In September the Biden FHFA announced it would require Fannie and Freddie to “prepare and implement three-year Equitable Housing Finance Plans that describe each Enterprise’s planned efforts to advance equity in housing finance.” Translation: They must find ways to boost minority homeownership no matter the risk for taxpayers.
The plans released last week might have been written by California Rep.
Central to Fannie’s plan are “Special Purpose Credit Programs” that increase access to credit and encourage “sustainable homeownership for Black consumers.”
One program would assist black borrowers with down payments. Most home-buyers are required to put down at least 20% of the cost of a new home to reduce the risks of default. Fannie’s plan would effectively require taxpayers to subsidize down payments for black borrowers. Revenue that Fannie earns on its mortgage portfolio is retained as capital to protect taxpayers during a downturn. Under Fannie’s plan, some of that revenue would go to reducing down payments.
Another new program would reduce “loan level price adjustments” for black home buyers. Lenders typically charge higher rates for borrowers with lower credit scores, and Fannie says reducing them can “reduce obstacles for prospective Black homeowners.”
Still another program would “support the reduction of borrower closing costs for Black homebuyers”—for instance, via appraisal reimbursements. Taxpayers would help finance this “support.” Fannie also wants to help black homeowners avoid foreclosure by helping them “deal with unexpected expenses and repairs, or temporary disruptions to income.” This suggests that Fannie may now push into funding home repairs and welfare.
Calling all of this mission creep is an understatement. The GSE equity plans would let the Administration spend billions of taxpayer dollars on housing without Congress appropriating a cent.
Fannie says these credit subsidies are merely “pilot programs” that will be tested “in predominantly Black geographic markets”—i.e., big liberal cities—and evaluated based on “applications made to participating lenders from Black consumers” and “loans to Black borrowers.” But government housing subsidies always start small and expand as they develop a vested constituency.
Today the GSEs are in relatively good financial condition but that could change if underwriting standards loosen. That’s what happened in the 2000s as former Rep.
famously said in 2003 he wanted to “roll the dice” on subsidies for housing. They came up snake eyes for taxpayers and owners who borrowed more than they could repay.
Freddie Mac’s equity plan also includes credit programs to address “systemic barriers” to housing for minorities but at least tries to camouflage its racial preferences. Fannie makes its subsidies for blacks explicit, but they don’t appear to extend to other racial groups such as Hispanics and Asians. Low-income white borrowers are also excluded.
These racially targeted subsidies are probably unconstitutional. Multiple federal courts have blocked a $3.8 billion Covid relief program to forgive loans for minority farmers. The Biden Administration may argue that a different legal standard applies to private companies like Fannie and Freddie, and that the credit programs are aimed at remedying past redlining.
But the GSEs are de facto state actors, and the Supreme Court held in Richmond v. Croson (1989) that governments may adopt racial set-asides only to remedy specific episodes of past discrimination that the government had a hand in. The GSE plans are supposedly intended to compensate for government-sanctioned redlining in the 1930s that Congress banned in 1968.
Making home ownership affordable is a worthy goal, but more subsidies that endanger taxpayers aren’t the answer. Housing costs are high because of inflationary monetary policy and regulatory and zoning limits on supply. No economic good, and much social harm, will come from turning Fannie and Freddie into agents of progressive racial division.
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