Finally: The City of Philadelphia is launching mortgages.
One Philly Mortgage is a new program in which first-time home buyers with mediocre credit will be able to get a 30-year mortgage partially backed by the city. “If you have a credit score of 620, we want the banking industry to say, ‘Hey, we’ll take this risk, but the city of Philadelphia proper shoulders it,’” Mayor Cherelle Parker (D) said on Tuesday.
Philadelphia knows a thing or two about lackluster credit scores. The city’s bond rating, according to S&P, is the same as China’s and lower than Slovenia’s. It has over $6 billion in unfunded retirement benefits for its own employees. So perhaps it’s only natural that it wants to encourage dubious mortgage debt decisions.
Details are still being developed, but the mayor says the city has created a “loan loss reserve” that will help lower monthly payments. Down payments will be capped at no more than 3 percent of the purchase price, and mortgage rates will be 1 percentage point below the current market rate.
The city government will pay the extra interest costs and assume the default risk that mortgage insurance usually covers. This would result in people receiving mortgages who would otherwise be declined or need to pay higher rates. Not to worry, the city says it will also pay for “counseling support” before and after the purchase to help homeowners avoid default.
When private lenders make loans to people they know are unlikely to be able to pay them back, that’s called predatory lending. When a government encourages the practice, it’s apparently social justice. In both cases, it’s predatory: on the borrower in the former and on the taxpayer in the latter.
Tools such as credit scores are not only for protecting lenders from uncreditworthy borrowers. They are also for protecting borrowers from being saddled with debt they cannot repay. It is for the mutual benefit of both the borrower and the lender when someone who doesn’t have the means to pay back a loan is declined.
Higher interest rates and mortgage insurance also serve to protect borrowers who are lower risk from having to pay the costs associated with higher-risk borrowers. Philadelphia’s innovation is to say that its taxpayers will shoulder those costs instead.
Citizens are already shouldering quite a lot for local government. Philadelphia has a 3.735 percent tax on wages, a 3.74 percent tax on interest and dividends, a 2 percent sales tax and a 1.3998 percent property tax. That’s on top of the state and federal taxes residents must pay. Businesses within the city limits are taxed at over four times the rates of businesses in neighboring Pennsylvania counties.
The mayor’s generosity with other people’s money will set more borrowers up for foreclosure in the future. She can transfer some of the burdens of bad loans onto other people, but she can’t make financial reality disappear.
Subsidizing demand without increasing supply will also make existing homes cost more for all the folks who aren’t getting the new government handouts.
Rather than juicing demand with subsidized borrowing, the city should look at expanding the housing stock. Just 7,256 single-family home permits were authorized in the Philadelphia area last year. That was more than 4,000 fewer than in Raleigh, North Carolina, a metro area with roughly one-quarter as many people. It takes about three years to build a house in Philadelphia, longer than in all but two American cities.
Last year, the City of Brotherly Love failed at the proverbial basic task of city government — collecting the trash — for eight days due to a strike. Only 17 percent of fourth-graders in the city are proficient or better in reading. The transit system is dilapidated and unreliable. As mayor, Parker has presided over an impressive drop in murders, but Philly’s homicide rate remains about 80 percent higher than Mexico City’s. Residents would be far better off if she focused on core government functions rather than branching out into financial services.
If states are the laboratories of democracy, cities are its alchemy workshops. From grocery stores to hotels to golf courses to mortgages, there seems to be nothing private industry does that some city won’t try to do worse. Municipal government needs fewer visionaries and more hardheaded managers who can efficiently and effectively do the things government is supposed to do and leave everything else alone.
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