There seems to be no failed program from the past that the Biden Administration isn’t willing to implement in the present. Under pressure from the Federal Government, the second largest bank in the United States is beginning a first-time homebuyers’ test program in black and Hispanic neighborhoods. Bank of America Corp. plans to give home buyers mortgages without down payments, closing costs, or minimum credit scores.
The program will especially target areas of Dallas, Detroit, Los Angeles, Miami, and Charlotte. The bank will use credit scores related to rent, utility, phone, and auto insurance payments to qualify borrowers for mortgages. Homebuyers in these Democrat districts will be given down-payment grants of $10,000 to $15,000, and — presto — like magic, they will have immediate real estate equity!
But does anyone in Washington remember the subprime mortgage fiasco engineered by Bill Clinton and his boy-wonder HUD director Andrew Cuomo? Yes, the Andrew Cuomo from the COVID-19 nursing home death and destruction fame. A veteran of poor decision-making before his stint as New York governor, he created a system that pushed banks to grant loans based more on racial equity than balance sheet integrity. Loans were to be based on affirmative-action outcomes. The housing bubble and consequent national financial meltdown in 2007 set back the country’s finances and punished the very people it was designed to help. Many borrowers ended up with terrible credit scores that locked them further into poverty.
It seems that lending money to people who are not qualified to pay it back only works well until there is a housing market setback. If housing prices drop and the bubble bursts, there is little incentive to pay back the lost equity, and it leaves behind an avalanche of evictions, bankruptcies, and broken lives.
As any loan shark, sometimes known as a credit card company, will tell you, lower-down-payment loans perform badly in the long run. That is why the lenders demand their pound of flesh upfront through exorbitant interest rates. So, just as U.S. credit card debt hit an all-time high of $930 billion in August, with younger borrowers defaulting at a rate higher than other borrowers, the Biden administration wants banks to double down on loans to low-equity borrowers in the housing market. Seriously, what could go wrong with that plan?
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Borrowers will need a certification from the Department of Housing and Urban Development and counseling to qualify. And while the borrowers don’t have to provide their race, the neighborhood selected will be predominately black and Hispanic. How strange would it be if low-income whites decided to homestead in these neighborhoods, further destabilizing the equity agenda? Creating market inefficiencies often leads to unpredictable, if not volatile, outcomes.
It all sounds like a boom waiting for a bust. And if taxpayers hadn’t bailed out banks in the past despite their bad market decisions, they might be more careful about policies that lead to poor balance sheet performance. And while Joe Biden may no longer be in office if disaster strikes, any successor will be tagged with cleaning up the mess should the current COVID-inspired housing market burst its bubble.
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