Obama Administration Pressures Banks To Give Loans To People With Weak Credit

This seems vaguely familiar. The Obama administration has started a full court push to get banks to make more home loans available to people with weaker credit. After the housing collapse leading to the tanking of economy, many experts pointed out in congressional hearings on the problem of loans to unqualified owners and that Congress spent years demanding more and more loans to low income families with bad credit. However, President Obama has pledged that low income families would again be able to enjoy home ownership in his recent State of the Union address. I tend to resist such government moves in the market on economic grounds. This is a market that favors granting loans. There is already considerable incentive to find such business and the economy is finally limping back with home values going up. It would seem a bad time to pressure banks to grant loans to high risk home owners — as it is for high risk home owners to commit to such purchases.

I support the motivation behind this push and I admire Obama’s record of working for lower-income citizens. However, I do not think that the government should be pushing high risk loans at the very time that the economy is rebounding. I also do not think that the government should be the guarantor of high risk loans when we are shutting down essential programs needed by the public at large. With poverty at 1960s levels and cuts in educational programs, I would prefer more kids fully funded schools than more couples in high-risk homes.

These banks have an incentive for make loans but we have wisely passed regulations trying to require more support for loans across the board from banks to avoid another collapse. However, housing officials in the Administration are pushing for formal assurances to the banks that no one will face legal or financial penalties if these loans (as in the past) result in defaults and foreclosures. Interest rates are at an all time low (we just refinanced our home at an unbelievable rate). It is possible to secure exceptional rates for a home with a relatively low downpayment. The loans being pushed by the Administration concerns applicants who, even with the low interest rates, are not viewed by banks as good risks to actually pay off the loan. While more homes are likely to be built in helping the economy, more people will likely lose their credit and down payment money in foreclosures.

The rebound is less than a year old and remains sluggish in many areas. We are also facing continued unemployment problems and rising costs. Putting aside the wisdom of counteracting market decisions on high risk loans, I do not see why this is a wise move for those taking out the loans rather than renting a bit longer until they have the equity to support such loan burdens. Like most people, I want to see more people enjoy home ownership. However, looking at this objectively (and in light of our recent massive foreclosures on high and mid risk loans) is this a wise move at this time?

Source: Washington Post