The housing market came roaring back, but according to the Obama Administration, if you’re poor or young, you wouldn’t know that. To stimulate homeownership among these two demographics, the Administration is pushing to once again relax standards on lending to people with weak credit.
If this sounds familiar, it was this flawed policy that led to the risk lending practice and irresponsible borrowing which fueled the last recession.
Since the financial crisis in 2008, the government has assumed major control of the housing market by insuring between 80 to 90 percent of all new loans through the Federal Housing Administrations (FHA), a part of the executive branch, and Fannie and Freddie Mac, both taxpayer-financed. New rules were set ostensibly to prevent the housing bubble.
The FHA and White House are now pushing banks to relax those rules and make loans to Americans with lower credit and incomes that might make home buying a stretch. For example, under FHA terms, a borrower with a 500 credit score and 3.5 percent down payment should qualify for a loan. However, many banks would reject this borrower preferring one with more to put down and/or higher credit scores in the 700s and above.
As the Washington Post explains, banks prefer to be cautious about lending to those who may not have the means to repay the loans, knowing that they are on the hook one way or another:
After years of intensifying investigations into wrongdoing in mortgage lending, banks are concerned that they will be held responsible if borrowers cannot pay. Under some circumstances, the FHA can retract its insurance or take other legal action to penalize banks when loans default.
“The financial risk of just one mistake has just become so high that lenders are playing it very, very safe, and many qualified borrowers are paying the price,” said David Stevens, Obama’s former FHA commissioner and now the chief executive of the Mortgage Bankers Association.
The FHA, in coordination with the White House, is working to develop new policies to make clear to banks that they will not lose their guarantees or face other legal action if loans that conform to the program’s standards later default. Officials hope the FHA’s actions will then spur Fannie and Freddie to do the same.
The effort requires sign-on by the Justice Department and the inspector general of Department of Housing and Urban Development, agencies that investigate wrongdoing in mortgage lending.
Not everyone is falling for it:
“If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.
This is not the first or only attempt by the Obama Administration to ease wise rules on lending. In late 2014, we reported on rumblings that the government was up to the same old tricks again. They seek political points by relaxing borrower standards, but do so at the risk of long-term damage.
As a millennial, I would love to buy a home. We are the most educated generation but our resources are highly leveraged with $1.2 trillion worth of student loan debt. The average 2015 college grad tugged over $30,000 in debt with her across the graduation stage. Data shows that as a result we’re delaying forming our own households, getting married, starting families, and other factors that lead us to homeownership.
However, I remember the bountiful years before the recession when I saw television housewives lavishly living large using their homes as collateral or riding the house flipping market. My neighbors back home bought luxury cars and family acquaintances financed expensive vacations by borrowing on the equity in their homes as though it was an ATM machine. That came crashing down and I saw painful episodes of people losing everything.
That is not a legacy I would assume President Obama wants to leave behind. Of course, he will be out of office by the time the damage is done and the next President will be left with the mess.
This may be too doomsday, but our economy is barely chugging along and the Great Recession is still fresh on our minds. Another economic set back is the last thing we need and by pushing for the same policies that triggered the last one we face a risk.