Thursday
July 24, 2014

Obama Administration to Banks: Ease Up on Home Loans

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Obama Administration to Banks: Ease Up on Home Loans

The Obama administration is making a push for home loans to be more available to those with weaker credit, adding that the housing recovery is leaving too many potential home buyers behind -- particularly young professionals -- who can’t qualify for financing. 

The administration says easing up mortgage standards would also help provide a boost to the economic recovery. However, critics say it could prompt the return of risky lending that was blamed for igniting the housing crash. 

The administration says it is working to get banks to lend to more borrowers by taking advantage of government-backed programs, like the Federal Housing Administration. The administration and the FHA are working to develop new policies so that banks can feel more assurance they won’t face legal action or lose their guarantees if loans that conform to the program’s standards later default. The administration hopes that mortgage giants Fannie Mae and Freddie Mac will follow suit. 

But the idea of banks easing up on their standards has some concerned. 

"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 Fannie Mae. 

From 2007 to 2012, new-home purchases dropped 30 percent for buyers with credit scores above 780, the Federal Reserve reports. But the drop was even more pronounced for borrowers with credit scores between 620 and 680 -- falling about 90 percent. Credit scores between 680 and 620 (out of 800) were once considered a “respectable range” for a credit score when applying for a mortgage, The Washington Post reports. 

"If the only people who can get a loan have near-perfect credit and are putting down 25 percent, you're leaving out of the market an entire population of creditworthy folks, which constrains demand and slows the recovery," says Jim Parrot, the former senior adviser on housing for the White House's National Economic Council.

Source: “White House Pushes for Home Loans to People With Weaker Credit,” The Washington Post (April 3, 2013)

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