Rock + Hard Place = Feds Push Banks to High Risk Buyers

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics and historians say could open the door to the risky lending that caused the housing crash in the first place.

(Parenthetically, the correct phrase about being “doomed to repeat history” comes from George Santayana. What he did write in his book ‘Reason in Common Sense’ was:  "Those who cannot remember the past are condemned to repeat it.")

Economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession. (True that.)

So In response, the feds are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default. (Makes it sound like the loans are guaranteed by the Justice Department, doesn’t it?  I guess there’s something to be said for oxymoronic multi-tasking.)

After all, the Prez did pledge in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery. But here’s da facts: From 2007-2012, new home purchases fell 30 percent for people with credit scores above 780 (out of 800), according to the Federal Reserve. However, they declined 90 percent for people with scores between 680 and 620, which has historically been a respectable range for a credit score.

So on the upside, the Federales are encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps.

FYI: since the financial crisis in 2008, the government has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans. (Fun fact: The feds have done so primarily through the Federal Housing Administration, which is part of the executive branch, and taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, run by an independent regulator.)

The FHA historically has been dedicated to making homeownership affordable for people of moderate means. Under FHA terms, a borrower can get a home loan with a credit score as low as 500 or a down payment as small as 3.5 percent. If borrowers with FHA loans default on their payments, taxpayers are on the line — a guarantee that should provide confidence to banks to lend.

Nonetheless, banks are largely rejecting the lower end of the scale, and the average credit score on FHA loans has stood at about 700. After years of intensifying investigations into wrongdoing in mortgage lending, banks are concerned that they will be held responsible if borrowers cannot pay.

(Of course, cynics are noting the actions - or lack thereof - of the nation's lenders are payback for the Dodd-Frank Act.)

As one of the President’s former FHA Commissioners crystallized the situation: “The financial risk of just one mistake has become so high that lenders are playing it very, very safe, and many qualified borrowers are paying the price.”