Pumping Up A New Housing Bubble

The Washington Post carried a story a few days ago with a surprising headline:  “Obama administration pushes banks to make home loans to people with weaker credit.”

Wait, what is this — 1997?

housing-bubbleThe story details the Obama Administration’s concern that while the housing market is getting stronger, not everyone is benefiting.  That’s because banks are leery about making home loans to new borrowers and people whose credit scores are iffy.  As a result, the Administration is trying to encourage banks to make more loans using programs funded by taxpayers that insure banks against loan defaults, including programs of the Federal Housing Administration.  The Obama Administration wants lenders to use more “subjective judgment” in making loans and wants to make it easier for homeowners whose houses are underwater to refinance their loans.

The article further notes that, since the Great Recession hit in 2008, the government has been insuring between 80 and 90 percent of new home loans.  One of the principal federal agencies involved is the FHA, which allows borrowers with credit scores as low at 500 or down payments as little as 3.5 percent to get home loans.  Banks aren’t going down to that low end of the scale, however.  The average credit score on FHA loans now is 700, because banks are worried that if their loan portfolios are hit with defaults they’ll be held responsible — so they’re playing it safe.  From 2007 to 2012, banks rejected loans for 90 percent of applicants with scores between 680 and 620.

It’s amazing that, so soon after an economy-shaking recession that was largely caused by a massive housing bubble and ridiculous lending practices, regulators would be urging banks to loosen up their loan portfolios, make “subjective” decisions, and rely on the good ol’ taxpayer to insure them against risky lending practices.  It appears that banks have tried to learn their lesson and not repeat the practices that made The Big Short such a wild romp.  Don’t we want banks to be prudent?  And why should the federal government be insuring such a large percentage of new home loans, anyway?  If so many loans are being made to people with strong credit scores and meaningful down payments, why should taxpayers be standing behind 80 to 90 percent of those loans?  Don’t we want banks to make their own credit decisions and take their own risks?

Oh, and one other thing:  the article talks about how owning a home helps build a family’s wealth, and notes that without looser loan standards many young people will be forced to rent rather than buy.  This seems like ’90s-era thinking to me.  The reality now is that many young people don’t want to be tied down to an immobile asset that consumes a huge chunk of their monthly paycheck and won’t be paid off for 30 years.  They like renting because it gives them flexibility and the chance to pursue those good-paying jobs that are so hard to come by and might just be in another city or another state.  With some people saying the economy is teetering on the brink of another recession, can you blame them?