In his state of the union, President Obama complained that credit was too tight. “Even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected,” he said. “Too many families who never missed a payment and want to refinance are being told no. That’s holding our entire economy back.”
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The Washington Post’s Zach Goldfarb reported last week that “skeptics say [the administration] could open the door to the risky lending that caused the housing crash in the first place.” Who is right?
I see little risk that credit providers are ignoring the painful lessons of the housing crash. Although there is renewed optimism about the housing market in many places for the first time in quite a while, credit remains tight. Opening up homeownership to a wider range of creditworthy borrowers isn’t assuming risk blindly—it’s restoring balance.
Since the housing crisis, skittish banks and policymakers have overcorrected. Risk has been managed by imposing bright lines. Rigid rules have replaced rules of reason. “Compensating factors” are now rarely considered in underwriting a loan. Borrowers with 20 percent down payments and credit scores well north of 700 are being routinely turned away by automated underwriting systems. And while secondary market purchase requirements allow “manual underwriting” in theory, lenders fearful of being asked to assume risk on improperly underwritten loans are not taking any chances.
Even loans insured by the Federal Housing Administration (FHA)—which have historically helped more first-time, lower-wealth, and minority buyers—are not available to borrowers who have anything other than near-pristine credit, and too few do. Lenders are applying “overlays”: higher credit standards than FHA requires.
The administration is urging lenders to be more flexible, looking beyond credit scores to consider income, savings, job history, and other factors that can help assess the real capacity for and likelihood of repayment. This balanced approach can lead to sustainable homeownership that includes more families, especially in the context of the quality products that will be required under the Qualified Mortgage standards, which were released in January by the Consumer Financial Protection Bureau. And this approach takes into consideration the damage the financial crisis and ensuing recession have had on the credit of otherwise responsible homeowners. Without this flexibility, some borrowers and some communities will have a hard time moving forward.
These debates have serious consequences. FHA helps make homeownership possible for many borrowers who are not well served by the private market. In 2011, FHA accounted for 50 percent of all mortgages for black borrowers and 49 percent of mortgages for Latino borrowers. In 2012, 78 percent of the 1.2 million single-family home mortgages insured by FHA went to first-time homebuyers.
Research from my Urban Institute colleagues has shown how important homeownership is to building wealth. We should not expect homeownership to overcome growing inequalities in income and opportunity or the volatility in family lives that persist along racial lines and have deeper roots. But there is a real risk that the overreaction to the mortgage crisis will exacerbate other troubling trends. Overly tight credit not only hurts those who can responsibly handle the credit, but also slows the housing recovery that is beginning to build in many regions of the country.
At a time of growing income inequality, I fear a legacy of the housing meltdown will be to widen wealth gaps and harden the divisions between asset-haves and asset-have-nots.