Biden administration should avoid subsidies for risky mortgages

The Federal Housing Administration said Wednesday that it will reduce its annual insurance premium for future mortgages by 30 basis points. “On average, homeowners will pay at least $800 a year less on their mortgage, and that’s 800 more dollars in your pocket for household expenses,” Vice President Kamala Harris cheered.

Hasn’t the administration learned anything about the costs of government subsidies? Pandemic transfer payments helped fuel consumer demand and inflation. At the same time, the Federal Reserve’s historically loose policies drove a boom in housing prices, which rendered homes less affordable, especially once it tightened credit conditions.

The average 30-year mortgage fixed rate now stands at 6.5%, more than double what it was during the first two years of the pandemic. Higher home values have helped middle-class and affluent homeowners. But many lower-income and young people can’t afford the down payment and monthly interest.

The administration’s solution: Ease credit for riskier borrowers. The FHA insures mortgages for buyers with low credit scores and down payments as low as 3.5%. Home-buyers pay a 1.75% fee up front on a 30-year loan and then an annual premium of 0.8% to 1.05%, depending on the loan and down payment size.

The FHA’s plan will slash premiums to 0.55% for most new home-buyers, amounting to $1,400 in annual savings on a median-priced home. We warned last summer that the housing lobby was promoting a premium cut to boost the slowing market, and it succeeded.

Lower FHA premiums will be capitalized in higher housing prices. If a recession leads to layoffs, recent buyers may struggle to afford their monthly payments. The housing lobby says the FHA is well-capitalized, which may be true now. But rising interest rates combined with subsidies for marginal borrowers can be a lethal combination, as the housing bust in the 2000s showed. Caveat taxpayer.