The Obama administration is urging banks to fund home loans to borrowers with weaker credit, trying to create momentum toward economic recovery. White house officials say they are encouraging banks to start lending to borrowers with weaker credit again and to take advantage of taxpayer-backed programs, like those provided by the Federal Housing Administration, that insure home loans in case of default.
The Washington Post reports:
President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.
In his State of the Union address, President Obama pledged to take action so more Americans can enjoy the benefits of the housing recovery.
But critics don’t need to look far to find an example of the same practices gone awry, pointing at the risky home loan climate during the last housing boom a decade ago as the sharp pin that eventually popped the housing bubble. The well documented mortgage meltdown and subsequent crash of the housing market was signaled by a collapse of the subprime sector of the mortgage industry, attributed to risky loans to borrowers who couldn’t sustain their payments. The same kind of loans to the same demographic of marginal-credit borrowers, they say, will yield the same results.
However, housing officials stress that they only trying to allay unnecessary hesitation among lenders, and that the banks have become too cautious and conservative amidst fears of repeating past mistakes. Even the Justice Department is being asked to provide assurances to the banks that they will not face legal or financial consequences if they provide loans to high risk borrowers who later default.
“There’s always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s,” said a senior administration official, off the record.
The Obama administration states that they we aren’t going down the same slippery slope with marginal credit borrowers, only asking banks to also utilize subjective criteria when qualifying today’s borrowers, who may have taken a credit hit due to the recession, but are getting back on their feet. They claim that will lead to common sense initiatives like funding refinances to current homeowners who owe more than their house is worth, but could benefit by today’s low interest rates.
So the debate continues: how do you grant access to the American dream of home ownership and small business lending to more people without taking on unnecessary risk, and leaving taxpayers to clean up the mess if it fails? Do we send a life line to the shrinking middle class, or strengthen our overall economy by being more conservative with lending?
This discourse isn’t new – ever since the dawn of the movement to Democratize credit, starting with Jimmy Carter 30 years ago, the government has influenced the direction of the housing market. Since the financial crisis in 2008, the government has insured between 80 percent and 90 percent of all new loans, according to the industry publication Inside Mortgage Finance.
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Where do you stand on this issue? Should the banks try to extend home loans to borrowers with weaker credit, or will that lead to the same results? Is there a happy medium?
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