Gov’t looks at lending standards
Risky behavior, like lax lending in the housing sector and subprime mortgages, helped lead to the financial crisis. Lots of people just couldn't pay back their loans. Brett Neely reports on what the government may do.
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Kai Ryssdal: The Financial Crisis Inquiry hearings that we were talking about a couple of minutes ago are going to go on ’til the end of the year. The final report is not due until December. But you can already guess what some of the common themes are going to be. Risky behavior, for one.
Problem is that we all want to get the economy back to where it was a couple of years ago, without doing all the not-so-smart things taht we did to get the economy where it was a couple of years ago. Like easy lending in the housing industry and all those subprime mortgages. From Washington, Brett Neely has more now on banking behavior.
BRETT NEELY: At this morning’s hearings, JPMorgan Chase’s Jamie Dimon said when it comes to mortgages, his bank was going old-school.
JAMIE DIMON: We have substantially enhanced our mortgage underwriting standards essentially returning to traditional 80 percent loan to value ratios and requiring borrowers to document their income.
Banks are going back to 20 percent down payments and borrowers with steady jobs.
Chris Mayer, a real-estate economist at Columbia Business School, says that makes sense.
CHRIS MAYER: What Jamie Dimon is saying is if we’ve learned from this experience, it’s that we should not be making loans to people with no stake in their house.
Meanwhile, the government is also looking at lending standards. The Federal Housing Administration, Fannie Mae and Freddie Mac now guarantee nearly nine in 10 U.S. mortgages. Yesterday, the FHA said it’s investigating 15 mortgage lenders with very high default rates.
Mayer isn’t surprised.
MAYER: Because what the FHA is doing is really what subprime lenders did. They’re little to no money down, people with very, very dinged credit scores.
But if we want to get back to the go-go days of economic growth, some economists say we’re in a tough spot without taking risks.
Harvard economist Nick Retsinas says he understands why mortgage standards are tightening.
NICK RETSINAS: But it clearly will restrict the number of home buyers, it will restrict demand for housing, and it will certainly dampen any recovery in home prices.
And the overall economy.
In Washington, I’m Brett Neely for Marketplace.