FHA to Maintain Lax Mortgage Lending Rules
Lending on interest is a game of playing the percentages. The interest on a loan is supposed to represent (and cover) the risk the lender is taking by extending credit to that particular borrower. What happened during the mortgage crisis was that the lenders realized they no longer took the financial blow of a delinquent borrower, investors did, thus they had no incentive to deny any applicant, and were content to take their money and let the investors lose out when the borrower could no longer keep up with payments.
In response, lenders and government agencies like the Federal Housing Administration, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, were forced to violently revamp and tighten their lending procedures. This has stunted the only process that could really pull the mortgage market, and the economy up by their bootstraps, Americans signing mortgage loans and buying up the glut of vacant homes.
It seemed like the FHA was poised to continue this trend of covering their backsides by tightening their lending restrictions. Though the new rules would certainly have weeded out many potential delinquent borrowers, they were also disqualifying 1/3rd of the FHA's entire applicant pool.
The new requirement was simple: any applicants with unpaid bills, collection notices, or unpaid credit balances, would have to resolve their debts before their loan application could be accepted.
In the amended version, the loan officer is free to determine whether the debt puts the borrower at risk to miss mortgage payments, and the two parties can discuss options and come up with a fluid plan to pay resolve the debt, if need be.
Shifting risk and responsibility off taxpayers and investors, and back onto lenders, puts the system in its proper equilibrium, but keeps the market sluggish while potential borrowers who were hurt by the recession are unable to get loans. The FHA's customer base, typically middle and low-income families, have been the hardest hit. The noble and necessary goal of reviving America's middle class is a pipe dream while these folks are unable to find credit.
In order to prevent the perfect storm of circumstances that caused the near-market crash in 2008, lenders will have to tighten their lending regulations. It will take a while for lending institutions to find the right balance of criteria that protect the system, while making credit available to American consumers. Government agencies like the FHA will have to lead the charge for private lenders to follow.
By: Javi Calderon
