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Making credit available to home buyers

By: 6 February 2011 One Comment

Over the past few months, lenders have come under some fire for allegedly strengthening credit requirements so much that qualified home buyers can’t get a loan.

That’s an interesting charge, seeing how the mortgage industry has a vested interest in making money available to qualified lenders. Are credit requirements stricter than were a few months ago? Certainly, and there’s a reason for that.

One of the things that made the housing market boom in the first six years of the 21st century was easily available credit. That all came on the heels of both Democrats and Republicans in the White House and Congress encouraging people to purchase homes. Recall that former President Bill Clinton once declared that owning a home was a right, and the administration of former President George Bush also encouraged home ownership – remember the early part of Bush’s first presidency when the housing market was one of the few bright spots in an otherwise bleak economy.

Lenders took on a lot of risk back then – particular subprime lenders – and that easy credit helped bring on the rash of foreclosures that started in earnest around 2007 and are still in the system today.

In that context, indeed, it makes sense for lenders to reduce their risk of loaning money to people who might not pay it back. And, here’s another thing – the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 demands that lenders make a good faith effort to determine whether borrowers wanting purchase homes have the ability to meet their loan obligations.

The Dodd-Frank act does set out some of the criteria to help lenders determine the ability of a borrower to pay back a loan. However, the act also give the Bureau of Consumer Financial Protection (BCFP) – an independent group within the Federal Reserve System – some leeway in coming up with the criteria lenders will use in determining the creditworthiness of borrowers.

The national Mortgage Bankers Association has identified that group as one it will work with this year in coming up with some criteria. The Mortgage Bankers Association, in a legislative policy statement, said loans that do not meet the criteria set forth under the Dodd-Frank act will be very expensive for consumers if any are available at all.

For that reason, the Mortgage Bankers Association is urging caution. Considering the foreclosure mess, there is the temptation to make lending requirements very tough, indeed. However, there’s a problem in such an overreaction – requirements that are too strict could well freeze a lot of qualified buyers out of the market.

Over the past few years, we’ve seen the result of lending requirements that were – arguably – more than a bit lax. We know by now the economic impact of a large number of foreclosures and both the federal government and the mortgage industry are against going back to the days of easy credit, subprime loans and other practices that gave a lot of credit to people who couldn’t pay back their loans.

However, it’s important to exercise caution when developing lending requirements. If someone has the ability to take out a mortgage and pay it back, they don’t need to be left behind by unnecessarily strict credit requirements.

Column written by Ethan C. Nobles and distributed to Arkansas publications on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email =

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