We’ve been seeing signs for months that the housing market is coming back, but President Obama thinks too many people are getting shut out because of lackluster credit.
Now the Obama administration wants banks to let their guard down and start lending to a wider range of borrowers, according to the Washington Post.
The president is basically promising not to punish banks that start lending again to people with weaker credit. If those homeowners later default, the Federal Housing Authority insures the loans. And the FHA wants banks to size up potential borrowers more subjectively, by looking at factors like savings.
“Somehow making it a procedure to use more intuitive judgment about the borrower is probably a good idea, if it’s done right,” says economist and Yale professor Robert Shiller. He compares banks that are holding out for borrowers with stellar credit to colleges that look only at applicants’ SAT scores.
“Right now lower income borrowers are just shut out of the market. That is a problem,” Shiller says.
Critics of the plan say lenders should still apply lessons learned from the housing crisis -- requiring larger down payments and shorter loan terms.
“FHA’s lending standards still remain way too risky for many working class families and this push would just make people who should be able to achieve the American dream, give them a nightmare instead,” says Ed Pinto, a fellow at the American Enterprise Institute and a former Fannie Mae executive.
But the head of the Mortgage Bankers Association, David Stevens, says lenders are starting to allow for the fact that they may have over-corrected.
“The devil is in the details, and only by seeing the actual real policy proposals to be considered will we know what this ultimately may do to help the credit markets expand,” Stevens says.
So what are those details? The FHA declined to comment.