Biden's plan for high-risk mortgage subsidies kicks in next week
Financial expert Gary Kaltbaum says the new Biden rule forcing people with good credit to subsidize high-risk mortgages 'makes absolutely no sense' on 'Your World.'
There is a troubling trend toward abrogating the use of credit scores, criminal history and housing history to measure risk from the misbegotten sense that doing so will result in a better outcome for people who have traditionally fared poorly in the housing market, whether looking for a mortgage or a lease.
Those efforts will shift risk measurement to risk reduction in the form of higher prices. The answer is to help people improve their risk profiles with credit repair, broader measures and real help for people with criminal backgrounds.
Is there a problem? According to the National Association of Realtors, homeownership has been climbing among the general population, so that 65% of Americans are homeowners or paying a mortgage.
But for Black households, the number hasn’t moved over that period, staying stuck at 44% while 72% of White people are homeowners. It shouldn’t be a surprise with a look at poverty rates – 19.5% of Blacks are in poverty while the overall poverty rate is 11.6% – and credit scores, where 54% of Blacks report a FICO score of 680 or less.
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In response to this, the Federal Trade Commission is asking the public "to weigh in on a wide array of issues that affect tenant screening." The public engagement is part of an announcement by the Biden White House earlier this year to address "the creation and use of tenant background checks, the use of algorithms in tenant screenings, the provision of adverse action notices by landlords and property management companies, and how an applicant’s source of income factors into housing decisions."
President Biden speaks during his State of the Union address at the U.S. Capitol on Feb. 7, 2023. (Jacquelyn Martin/AP/Bloomberg via Getty Images)
There has already been a negative reaction to the administration’s promulgation of new methods of calculating fees that seem to shift costs to people with higher credit scores to the benefit of people with lower ones.
At the local level, Minneapolis has banned the use of credit scores and New York City has banned the use of eviction records to assess rental housing applications and a court sustained a Seattle ban preventing the use of criminal background checks.
Has any of this helped? At last check Minneapolis and Seattle are still in the middle of a "housing crisis," and New York is still the most expensive city in the United States. Developers of housing and housing providers have fewer tools to assess risk and price their product.
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These interventions have transferred traditional risk management techniques to cost management; if a lender or housing providers can’t manage risk they’ll manage it with higher prices, precisely the opposite effect needed.
The answer begins with broader measures.
On time rent payments have not been reported to credit agencies. One company, Pinata, has a platform that rewards on time rent payments and reports them to credit bureaus.
In Washington state, the Earned Release Housing Voucher Program provides real help for people leaving prison rather than a headline.
In Albuquerque, the city has proposed a landlord mitigation fund that would encourage housing providers to rent to tenants "considered higher risk based on credit history, income or other background concerns," by offering coverage "in the case of losses due to damage or lease payments."
Each of these interventions, taken together, could actually help real people. A person with bad credit has it for a reason: lack of adequate income. Banning the use of a score that reflects that doesn’t improve wages or the chance at success.
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Someone leaving prison needs money to pay rent and a transition plan: blocking a criminal background doesn’t pay the rent.
And blinding housing providers from seeing previous evictions increases their risk: a fund that would offset that risk would encourage them to take a chance.
Improving credit scores by adding in more information like regular rent payments would expand the data set used to measure possible risk.
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