Last week, the federal government announced plans to block medical debt from credit reports, which are used to evaluate a borrower’s financial fitness for large-ticket items, specifically mortgages and car loans. This would make it easier for folks to acquire more debt and not be “judged” for it.
All things being equal, it’s not a good idea.
Let’s ignore for now whether this is right or wrong and try to exclude all political thoughts. Let’s just look at the facts.
The Biden Administration Wants to Exclude Medical Debt from Credit Reports
It bears mention that exorbitant medical expenses happen all too often in this country. I, for one, needed heart surgery when I was born. Twice. And let me tell you, that was not fun for my folks. I would go so far as to say it sucks.
So when you get a large expense like this, and because our healthcare system is—to put it politely—buggy, you may need a loan to pay for it, and that expense becomes debt. And debt in one thing means you can’t pay as much for other things. Like a mortgage. Or a car loan.
So creditors have included all debt as a strike against one’s credit, limiting one’s ability to dig themselves into a debt grave and obtain another large loan, like a mortgage.
Speaking on the announcement, Vice President Harris said, “Medical debt makes it more difficult for millions of Americans to apply for a car loan, a home loan, or a small-business loan, all of which makes it more difficult to just get by, much less get ahead…No one should be denied access to opportunity simply because they have experienced a medical emergency.”
Unfortunately, this statement is laden with poor assumptions, and intervening in financial risk management is dangerous. Why? I’ll tell you.
The Impacts Will Further Hurt Inflation
At the individual level, having one loan you are paying makes it harder not just to apply for another loan, but to pay that loan back. Obtaining more debt is what makes it harder to “just get by.” It’s not an “opportunity to get ahead,” as she put it. It’s a liability that will hold you back—literally.
At the market/economic level, this policy is highly problematic in two major ways, both of which are inflationary.
Mortgage costs will go up
There will now be folks with a higher risk obtaining much more debt. Lenders will need to offset this risk with fees/interest rates to recoup losses when those riskier borrowers default. And since lenders can’t use medical costs to judge a borrower’s creditworthiness, all loan costs will have to go up to spread the risk peanut butter. Arg!
Also, why should the borrowers pay off their medical loans at all if it won’t affect their credit? If they don’t, our medical expenses will also increase! Hospitals will have to charge more for procedures to make up for the money they lose for those who don’t pay their debts.
Housing prices will go up
This is just simple economics. More folks will be able to obtain debt to buy a home. How many more individuals will realize this “opportunity” to pile more debt on their plate? The government estimates this will lead to an additional 22,000 mortgages, which, at a median home price of $420,000, is $9 billion in inflationary spending added to the economy.
Add another couple of percentage points for closing costs and related economic activity. This increased demand for homes and economic consumption spending during a time of extremely low housing supply means one thing: Prices go up!
Remember, this is the third inflationary housing policy in as many months proposed by the federal government, all during an extended three-year time period of high inflation, which is still nearly double the Federal Reserve’s target rate. Back in March, the administration announced:
- $10,000 cash tax credit for many homebuyers
- $10,000 cash tax credit for some home sellers
You’re kidding yourself if you don’t think this will negatively affect inflation.
Shelter Inflation is Already Driving Inflation
According to the May inflation report, shelter costs increased 0.4% for the fourth consecutive month and were the largest factor in the monthly inflation numbers. Shelter increased 5.4% over the last year, accounting for over two-thirds of the total 12-month inflation increase. This policy will make this even worse.
Yuck.
And if you overlay shelter on top of inflation in the graph, you can see just how much higher we are than pre-2019. Shelter is still rising every month faster than ever before. Overall, inflation is at 2011 levels, when housing prices bottomed following the great financial/housing crisis.
Think shelter was bad in May? Medical care costs rose even more this past month (0.5%), meaning this policy of easing access to more debt on top of medical debt will be even more inflationary and risky for lenders.
This is why passing policies that are inflationary to the housing market is so problematic. It’s just so pervasive in our everyday lives.
My Take
As was said many years ago by some old French dude, “The road to hell is paved with good intentions.” True, IMO.
This is what happens when well-intentioned policymakers (ostensibly) intervene in a marketplace. I can guarantee you that Fed Chair Jerome Powell took a deep sigh when he heard about this proposal from the administration. It’s not helpful. Without a significant drop in inflation, he can’t cut interest rates because doing so is also inflationary.
Ah, the humanity!
It is important to note that this announcement is still in the rule-making stage, so it will take time to become policy (i.e., after the November election), and Congress or courts may block it. But the White House did put out a press release showing the Biden administration is serious about implementing it. And unlike the other two policies, they likely don’t need Congress’ approval to implement it.
Also, the irony is not lost on me. And I can’t help but laugh. The federal government is doing the opposite of what it intends. Leaders are proposing to use $7 billion in American Rescue Plan funds, which the government borrowed, to pay medical expenses, which people borrowed, so that people can borrow more, and lenders can make it more expensive for them to do so. A lot more.
Mortgages are the largest debt line item for households. And this is all during a horribly inflationary economic environment.
Inflation is here to stay. This month’s report is being received positively in the press and equity markets because it wasn’t worse—not because it was good.
And the cycle continues.
I can only assume this announcement is just political. The Washington Post calls it “poised to be part of President Biden’s closing argument that he is addressing pocketbook issues.” So I get it. That actually makes rational sense, at least with the election five months away.
But if it’s not, and they seriously believe this is helping? Then it’s official: The government has taken a permanent intellectual vacation.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
