Updated: Apr 22
Dr. Thomas Sowell, one of the greatest American economists, is famously credited for having said: “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” This quote undeniably epitomizes President Biden’s lack of economic knowledge. The president’s lack of economic knowledge and understanding is a serious problem for this country because his decisions negatively affect millions of people. Recently, President Biden announced that he intended to implement a rule that will force good-credit homebuyers to subsidize loans to high-risk borrowers. And this law is set to go into effect on May 1.
President Biden’s decision is perhaps one of the worst decisions he made while in office. What President Biden does not understand or maybe decided to deliberately ignore is that political decisions have economic consequences. Is President Biden that naïve to believe that making good-credit homebuyers subsidize high-risk borrowers will improve access to the housing market? Does he seriously believe that this redistributive policy will improve the housing supply? In a White House press release, the Biden administration stated the following:
“Today, President Biden is releasing a Housing Supply Action Plan to ease the burden of housing costs over time by boosting the supply of quality housing in every community […] The plan will help renters who are struggling with high rentals costs, with a particular focus on building and preserving rental housing for low-and-moderate income families. The Plan’s policies to boost supply are an important element of bringing homeownership within reach for Americans who, today, cannot find an affordable home because there are too few homes for sale in their communities.”
Beyond this polished and well-manufactured political rhetoric to make those who do not understand the economic and financial implications of such a plan, believe that this decision is for “helping” the poor. What this policy is implicitly doing is making good-credit homebuyers subsidize high-risk borrowers who can potentially go underwater. Experts believe that borrowers with a credit score of about 680 would pay around $40 more per month on a $400,000 mortgage under rules from the Federal Housing Finance Agency that go into effect May 1—costs that will help subsidize people with lower credit ratings also looking for a mortgage. Under the new rules, consumers with lower credit ratings and less money for a down payment would qualify for better mortgage rates than they otherwise would. This is a clear pattern to repeat the subprime mortgage crisis of 2008. While it may not be Biden’s intention to take America into another subprime mortgage crisis, especially since he is seeking reelection next year, his new rule could lead to that once in effect.
The recession of 2008 was triggered by this exact mechanism that President Biden is pushing for. Prior to 2008, many people with low-credit ratings were granted loans to buy a house. This led to an increased demand for housing and the price of homes rapidly rose. The problem is that the price of housing couldn't keep increasing forever. As people realized that the price of housing stopped augmenting, Many people started selling their houses and the value of the housing market started to sharply decline. The worst part is that those who were granted loans while having low-credit ratings were now underwater and had negative equity, which means that the home’s value is less than the outstanding principal on all mortgages and loans on the property. It is important to understand that underwater mortgages impede housing wealth accumulation and decrease spending power. Being underwater for many homebuyers means defaulting on their mortgage, or selling the house at a loss.
The new Biden rule is unfair to good-credit homebuyers who worked tirelessly to build their credit. They will now have to pay higher mortgage rates to subsidize potential underwater homeowners. President Biden is playing a dangerous game in the wake of the 2024 elections. While it may not be his intention to take America into another subprime mortgage crisis, especially since he is seeking reelection next year and needs to keep the economy in good standing to assure his reelection; his new housing policy, however, will possibly lead to the path of the subprime mortgage of 2008. Another subprime mortgage crisis is not what America needs right now.