- The American Jobs Plan would make homeownership less accessible to low-income and minority home buyers.
- If you can’t put 20% down on a home purchase, you need to pay for mortgage insurance.
- Biden’s plan would make private mortgage insurance more expensive.
- Jerry Theodorou is the Director of the Finance, Insurance and Trade Policy program at the R Street Institute.
- This is an opinion column. The thoughts expressed are those of the authors.
Home ownership is a pillar of the American dream. Last year, the pandemic made many Americans realize that they wanted this dream as soon as possible. Many turned to Redfin and Zillow, moving from house to house as travel was limited. Reports quickly followed on soaring house prices and growing demand, with tenants turning into buyers and people looking for more living space.
At first glance, this news sounds like a boon to the US economy. Owning a home creates equity and intergenerational wealth, and it can provide a cushion against financial setbacks. Yes, there are risks, as the 2008 financial crisis showed, but US home ownership is still on the rise.
It is therefore puzzling that, as the economy continues to recover, the US jobs plan proposed by the Biden administration would create new barriers for minority and low-income first-time buyers. In an effort to pay for the plan, the government would increase the cost of private mortgage insurance, potentially crushing the dreams of millions of Americans.
Inequality in homeownership
Minority and low-income families would be hit hardest by the new legislation, as 40% of loans with private mortgage insurance go to families with annual incomes below $ 75,000, and 60% go to first-time buyers. . The disparity between home ownership by black families and white families is already significant: 42.3% of black families own a house against 72.2% of white families. The Biden plan would only widen that gap.
Home buyers can pay as little as 3% of the purchase price of a home as a down payment. But for those providing less than 20%, mortgage insurance should be taken out to protect lenders against a borrower default. But private mortgage insurers need to be financially strong enough to withstand the inevitable peaks and troughs of the cyclical real estate market. Since the 2008 financial crisis, new regulations have forced insurers to maintain sufficient capital levels to survive another downturn.
Insurers have strengthened their capital base by purchasing reinsurance – insurance for insurance companies. Think of it as a financial buffer that spreads risk globally and acts as a bulwark against crippling losses from catastrophic events. Reinsurance is so important to mortgage insurers that in 2020, U.S. insurers have shared over 30% of their mortgage insurance risk with non-U.S. Sources. Bermuda’s reinsurers, for example, alone accounted for just over 50% of these cessions.
The failure of the Employment Plan
This is where the United States Jobs Plan comes in. First, it would increase the corporate tax rate from 21% to 28%. Second, it would impose an overall minimum tax rate that dilutes the benefits of Bermuda reinsurance. For mortgage insurers, this will inevitably lead to higher prices. Currently, reinsurers in Bermuda do not impose corporate income taxes, allowing mortgage insurers to benefit from the availability of low-cost mortgage insurance.
These actions seem well ahead of the average buyer, but the effects will be felt quickly. A higher corporate tax rate for mortgage insurers will reduce their profits. To recoup those lost dollars, they will increase the mortgage insurance rates required for all homebuyers who put less than 20%. Simple financial modeling suggests that rates could rise by around 10% overall, a significant increase for borrowers, pushing homeownership even further for those on the lowest incomes.
The math is pretty straightforward. Mortgage buyers with excellent credit scores – over 740 – who put 3% less on a $ 200,000 home pay about $ 9,500 for mortgage insurance over eight and a half years until that time. that the loan-to-value ratio falls below 80%. Borrowers with a credit score between 680 and 699, slightly below the national average, with the same down payment on the same home pay about $ 19,800 in mortgage insurance. Under Biden’s plan, those costs could increase by up to 10%.
If the American Jobs Plan becomes law, the cost of insurance will rise, potential buyers will be directly affected and, therefore, the economy as a whole.
The Biden administration should stop creating barriers to homeownership and instead support policies that will help first-time homebuyers, especially low and moderate income families, especially in today’s environment. low interest rates. One way to start is to reconsider the globally imposed minimum taxation policies against free and fair trade. The American dream depends on it.