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

President_Barack_Obama220px-ForeclosedhomeThis 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

32 thoughts on “Obama Administration Pressures Banks To Give Loans To People With Weak Credit”

  1. The stated goal of all the stimulus has been to “get credit flowing again”. That means in a world economy drowning in debt, their solution is for more people to go into more debt?! Why would they do that? Most people don’t understand that in our corrupt system the only way money is created is by allowing banks to lend it into existence via Fractional Reserve Banking. The money supply went from $300 Billion in 1970 to about $15 Trillion when the Fed decided to start hiding the number The economic collapse shrank the money supply = recession. The desperate ploy is to keep finding more ways to put consumers/taxpayers in debt to keep this Ponzi scheme of debt going, to keep the politician’s owners (The Banks) happy and the only place to get the money to pay off the old debt (plus interest) is to create even more money as debt.

    Even the IMF is starting to see this Ponzi scheme is in a death spiral and shocked the world last year by releasing their research paper advocating monetary reform with “The Chicago Plan Revisited”.

    Follow Ellen Brown on Web of Debt to understand what is really happening with the debt crisis, multiple dip recessions, and how badly we need monetary reform and Public Banks.

  2. RWL,
    you are right about the need for a handyman when you are buying the foreclosures. I have worked on closing where the former owners stripped the copper out of the homes when they walked away from the loan.

  3. I have two views on this topic. (1) I can understand why the Obama Administration is pushing the banks to do this: (a) Landlords are cashing in on low-incomers or people with weak credit histories. If you afford to rent a 2 bedroom townhouse for $550-$650 a month, then you could afford a mortgage payment (including the escrow: insurance and property tax) of $550-$650 per month? Furthermore, there are people who are renting houses for $800-$1100 per month, who could afford a mortgage payment of the same? (b) The Obama Administration and other economists know that financial institutions still have a ton of homes, waiting to flood the housing market. What will happen to the housing market if these homes were released onto the market this year? New home building declined for the month of March (according to CNBC). What will happen to construction of new homes?

    Financial Institutions are looking at the Obama Administration and stating: “If we lend (or take a risk) to these individuals or couples, then what’s in it for us? What incentives do you have for us to provide a loan to these people?”

    My 2nd view of this topic is that you can purchase a home from a housing auction, and not even deal with financial institutions. You can purchase a home, worth about $40k or more for as little as $5k-$7k at a housing auction. But be ready to have a handy man on stand by for repairs.

  4. Raff,

    ” If I recall, one of the problems with the predatory loans preceding the recession was credit worthy people being pushed into higher interest rate loans that were usually given to bad credit people. ”

    Yup. oh, and don’t forget that the banks figured out a way to sell the risky loans mixed with the safe loans but without having to tell the buyers about the full risk.

    Also, it’s worth noting that loaning money to people with weak credit isn’t inherently bad, just inherently risky.

  5. Home ownership reduces mobility of workers, limiting options to take other job opportunities or simply to exit areas in economic decline. Lack of equity and high transaction costs often traps those who need mobility the most.

    Homes would be a lot more affordable if they were less expensive, and people might not have to borrow as much to begin with. Government has pushed up prices through mortgage interest tax deductions, artificially low interest rates, massive loan guarantees and often many limits on new housing development in tight markets. All of those policies are counter to keeping prices at accessible levels, good credit or not. The same thing has happened to college tuition.

  6. Off Topic:

    Obama’s EU Trade Deal Would Include New Political Powers For Corporations
    By Zach carter & Ryan Grim
    Posted: 04/03/2013

    WASHINGTON — The Obama administration is pursuing a free trade agreement with the European Union that would grant corporations new political power to challenge an array of regulations both at home and abroad, according to an administration official involved in the negotiations.

    While the plan is still in its early stages, the effort alarms consumer and environmental advocates who worry it will lead to a rollback of important rules and put multinational companies on the same political plain as sovereign nations.

    If states are unable to pass and enforce laws within their borders, it could change the nature of their community and government, nonprofit groups emphasize. Exactly how broad these corporate political powers will be is undetermined, but one aspect of the agreement, known as “investor-state dispute resolution,” would allow a company to appeal a regulatory rule or law to an international court, most likely the World Bank. The international body would be given authority to impose economic sanctions against any country that violated its verdict, including the United States.

  7. I’m with mespo, raf, and SwM on this one.

    (I’d like to add to mespo’s history lesson that it was not only the banksters in England but also the fur trade businessmen/agents and land speculators in England that pushed Parliament to restrict coinage and credit in the Colonies. The colonists were refusing to stay put within the borders established after the French/Indian War and were taking land that speculators in England wanted for themselves and in the process were upsetting the Native Americans and thus the fur trade profits for England’s merchants. Restricting coinage and credit was the path chosen to restrict growth within the colonies and punish the colonists for ignoring the boundaries established through treaties.)

  8. I agree with Mespo and Swarthmore on this one. If I recall, one of the problems with the predatory loans preceding the recession was credit worthy people being pushed into higher interest rate loans that were usually given to bad credit people. Also, some of these same people were steered into adjustable rate loans with no caps or high caps on how much they could increase in a year. Plus, many of the foreclosures would have been avoided if jobs hadn’t been erased.

  9. A surplus of money causes easy access to money, the more the government prints and loans to banks the more access there is to it and the less buying power the dollar has, it causes inflation

  10. mespo,

    I do agree with that assessment somewhat, but there is a difference between easing access to credit (a good thing) and encouraging more purposeful bad debt (which is an underlying driver of the CDS debacle) which because there is no line between investment banking (essentially gambling) and commercial banking (actual banking that benefits most people and small business when constrained) can be profited from by defaulting so the investment banking crowd find lending with an eye toward default attractive.

  11. About a year ago, credit was so tight it was ridiculous and the red tape and requirements imposed upon applicants by banks was, in the view of my accountant, the worst he had seen in 35 years of practice. Getting a business loan was practically impossible unless it was secured nearly 1:1 with cash. Economic activity was constrained greatly much less growth.

    Yet on the same hand it was much due to the bad lending practices banks had got themselves into and the pendulum swung the other way.

    Neither of the above paragraphs describe situations that are healthy for the economy. Balances leads to economic stability. Volatility leads to wild speculation and unpredictable consequences.

  12. Agree with Mespo. Additionally, FHA actually requires documentation unlike the bankster culprits that caused the last housing collapse. As corporations buy more of the available housing stock and jack the rents up, this could give some a much needed break.

  13. Wait, wait, wait….. Don’t tell me….. I do think this is a good ideal….. The reason being…. There credit suffered because of the housing crisis….. They are being granted credit based on verified ability to pay…… I think it’s not such a bd idea….. If you look at the bigger picture…. Houses for sale are basically being redeemed….. By some of the same owners that lost them to forclosures to start with…. Come on give a man/woman it’s respect back….

  14. An abundance of credit is what makes economies thrive the default rate notwithstanding … and it always has done so. Injecting money into the system by means of affordable credit does not cause economic collapse just the opposite. Money sitting in bank vaults doesn’t build roads, open businesses, finance expansion or do anything. Constricting money supply (M1) by means of restrictive credit is what kills economies.Housing, by the way, affects 50% of the nation’s economy so what is the harm in extending credit to produce housing that has a life expectancy of over 40 years?

    Here’s Benjamin Franklin on the topic:

    We are in 1750. The United States of America does not yet exist; it is the 13 Colonies of the American continent, forming “New England”, a possession of the motherland, England. Benjamin Franklin wrote about the population of that time: “Impossible to find a happier and more prosperous population on all the surface of the globe.” Going over to England to represent the interests of the Colonies, Franklin was asked how he accounted for the prosperous conditions prevailing in the Colonies, while poverty was rife in the motherland:
    “That is simple,” Franklin replied. “In the Colonies we issue our own money. It is called Colonial Scrip. We issue it in proper proportion to make the products pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one.”
    The English bankers, being informed of that, had a law passed by the British Parliament prohibiting the Colonies from issuing their own money, and ordering them to use only the gold or silver debt-money that was provided in insufficient quantity by the English bankers. The circulating medium of exchange was thus reduced by half.
    “In one year,” Franklin stated, “the conditions were so reversed that the era of prosperity ended, and a depression set in, to such an extent that the streets of the Colonies were filled with unemployed.”
    Then the Revolutionary War was launched against England, and was followed by the Declaration of Independence in 1776. History textbooks erroneously teach that it was the tax on tea that triggered the American Revolution. But Franklin clearly stated:
    “The Colonies would gladly have borne the little tax on tea and other matters, had it not been the poverty caused by the bad influence of the English bankers on the Parliament: which has caused in the Colonies hatred of England, and the Revolutionary War.”


  15. If you give loans to underqualified you’re predatory, if you don’t you’re discriminatory. In the superb book, Quiet, the author talks about this in the context of extrovert v introvert. During the boom years the extroverts, who always rule, ridiculed the introvert bankers saying “This is crazy.” And, since the boom continued for several years they were more emboldened. Very wise introverts put their money on a BIG collpse, and won BIG. “Those who don’t understand history are doomed to repeat it.”

  16. Isn’t this what caused the problem the first time, giving loans to people that don’t have good credit ratings. Freddie mac and Fanny mae are still upsidedown. Used to be One put 20% down when purchasing a home, you invested in the stock market only with money you could afford to risk, and passbook savings accounts paid over 5%. then the government started printing money and loaning it to banks at 1% so why should banks pay depositers 5% on passbook accounts, people’s savings were losing money to inflation.

  17. While I wouldn’t want to deny the opportunity to own a home to anyone who really wants to, I think the concept of home ownership as a key component of the American Dream has been oversold. We preach a gospel that the only way to ensure financial security, a stable family life, and general happiness and contentment is to own a home. It’s the same thing we do with cars: we worship the personal vehicle as the key to freedom and the ability to travel wherever one wishes whenever one wishes, without having to be surrounded by Other People. We don’t figure in all that it costs us. We don’t figure in all that home ownership costs us, either. We just tell Americans that unless they have a house and a car, they can’t truly be happy–when many of us could probably be perfectly happy in a nice rental property with a public transportation system that’s clean and efficient.

  18. One concern is that owning a house is far more expensive than most renters realize.

    A rent payment is a fixed expense that typically covers all costs except for utilities. Unexpected repairs are the responsibility of the landlord (who may raise rents to cover costs, but those increases are over time and are constrained by market forces).

    Owning a house requires lump sum annual tax payments, maintenance (typically about 1% of the value of the house), annual insurance payments, and repairs (Murphy probably has an addendum to his law for home ownership) in addition to the monthly mortgage payment.

    Most poor people (I have been poor), have very small cash reserves; home ownership requires much better budgeting and bigger cash reserves than does renting.

    Bottom line, many current renters are not prepared for the jump to home ownership.

    Perhaps better to say that a significant percentage of those transitioning to home ownership will either failure or experience hardship.

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