Obama administration pushes banks to make home loans to people with weaker credit

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**Frazzled**

Everything has happened before, and will happen again...

http://www.washingtonpost.com/business/economy/obama-administration-pushes-banks-to-make-home-loans-to-people-with-weaker-credit/2013/04/02/a8b4370c-9aef-11e2-a941-a19bce7af755_story.html

Obama administration pushes banks to make home loans to people with weaker credit
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 say could open the door to the risky lending that caused the housing crash in the first place.

President Obama’s 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.

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.In response, administration officials say they 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.

Officials are also 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.

Obama pledged in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery, but critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars.

“If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

Administration officials say they are looking only to allay unnecessary hesitation among banks and encourage safe lending to borrowers who have the financial wherewithal to pay.

“There’s always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s,” said a senior administration official who was not authorized to speak on the record.

The administration’s efforts come in the midst of a housing market that has been surging for the past year but that has been delivering most of the benefits to established homeowners with high credit scores or to investors who have been behind a significant number of new purchases.

“If you were going to tell people in low-income and moderate-income communities and communities of color there was a housing recovery, they would look at you as if you had two heads,” said John Taylor, president of the National Community Reinvestment Coalition, a nonprofit housing organization. “It is very difficult for people of low and moderate incomes to refinance or buy homes.”

**hotsauceman1**

Y'know as a 20yr old, my biggest fear is not having credit at all, I need ot build it, but i have no money for it. So i can see where they are coming from.
But, I thought with weak credit you can still get a loan, just pay higher premiums and interest?

**Alfndrate**

hotsauceman1 wrote:
Y'know as a 20yr old, my biggest fear is not having credit at all, I need ot build it, but i have no money for it. So i can see where they are coming from.
But, I thought with weak credit you can still get a loan, just pay higher premiums and interest?

Getting student loans helps establish some level of credit (since it shows someone is willing to take a gamble on you). But that's not to say you should just go out and get as many student loans as you need... No need to saddle yourself with that debt.

**Ensis Ferrae**

Not always man... Honestly, best thing I did when I first joined the army was to get a cell phone plan. That one bill helped build my credit to where I got a pretty decent credit card, etc.

Yeah, occasionally you'll have to pay a higher down payment to get a loan, and/or get higher interest rates, but so long as people pay their bills on time, their credit should go up.

Depending on what type of loan you're after, weak credit may get you denied.. But not actually because of the credit. When my wife and I were buying our house, we were using one of our VA loans, and especially in home buying, debt to income ratio (your bills and "mandatory" expenses vs. how much you actively bring into the household) is the biggest determining factor in the whole process.

**Frazzled**

A credit report is much less meaningful for a home loan mortgage. As EF said, debt to income is the primary factor (or used to be, before the market started the subpar lending that led to 2007).

**Steve steveson**

Glad to see it's not just the UK being this stupid...

Banks loose money due to lax credit policies
Govenment scream blue murder at them for being to lax
Banks restrict credit.
Govenment scream blue murder at them for being to restrictive.

Politicians (and the genral public for that matter) don't get how credit works.

There is an argument that some people are stuck at high interest rates and could be much safer if they could remortgage at lower rates, but again, thats forgetting the fact that higher interest rates are how you offset some risk.

On a side note, I'm sure this is not an "Obama administration" thing and any govenment would be doing the same.

**hotsauceman1**

Correct me if im wrong, but didnt banks mainly affect people that they approved loans for people who couldn't afford them??

**Albatross**

I'm not sure what that question was.

**hotsauceman1**

I just remember my Proffessor telling me how banks would give loans to people for houses they just couldnt possibly afford.

**whembly**

hotsauceman1 wrote:
I just remember my Proffessor telling me how banks would give loans to people for houses they just couldnt possibly afford.

The government created rules to encourage that...

I think you're talking about the SubPrime mortgage crisis.

**Gitzbitah**

hotsauceman1 wrote:
Correct me if im wrong, but didnt banks mainly affect people that they approved loans for people who couldn't afford them??

I was thinking the same thing! I always thought the housing bubble popped because banks were letting people who couldn't afford the payments buy houses. They ended up giving loans to people with bad credit, and then through some financial wizardry making sure that someone else was holding the loan when the person who took it out stopped paying.

**Frazzled**

Albatross wrote:
I'm not sure what that question was.

Something about coconuts and swallows.

**Dreadclaw69**

While I like the thought that the banks are being made to lend money again I'm not sure what I think of this in the long run if people start getting loans they cannot repay again.

hotsauceman1 wrote:
I just remember my Proffessor telling me how banks would give loans to people for houses they just couldnt possibly afford.

Yeah, with things like monthly payments that were 110% of your wages but they would accept interest only payments. I can't see how that wasn't sustainable....

**hotsauceman1**

Didnt banks then essentially bet that those loans would fail?

**kronk**

It wasn't just that people were getting loans they couldn't afford.

It was also the crash of the housing bubble. People were buying houses then turning them around for $50k+ (MUCH higher in California) in profits, then doing it again. Finally, the housing market crashed, house prices rebounded, housing speculators went bankrupt, and banks/creditors got left holding worthless loans (again, especially in CA).

There is plenty of blame to go around, banks and speculators included.

I not certain that forcing banks to extend loans to people with weaker credit wouldn't serve to start a similar cycle rolling again, and I'm not for it.

**Alfndrate**

kronk wrote:
It wasn't just that people were getting loans they couldn't afford.

It was also the crash of the housing bubble. People were buying houses then turning them around for $50k+ (MUCH higher in California) in profits, then doing it again. Finally, the housing market crashed, house prices rebounded, housing speculators went bankrupt, and banks/creditors got left holding worthless loans (again, especially in CA).

There is plenty of blame to go around, banks and speculators included.

I not certain that forcing banks to extend loans to people with weaker credit wouldn't serve to start a similar cycle rolling again, and I'm not for it.

Were they turning them around for 50k+ after fixing them up and "rehabbing" them as it were? Or were they just buying a house for like 50 grand, and then turning around and selling it to someone for 100 grand as is?

I know that my parents did that with our current house, but we're certainly not planning on selling it...

**Frazzled**

Both, depending on the area.

The reason this is bad, is it sets up the exact same pressures as what started this joy in the first place. Its like galactic level face palm. The moment you stray away from 10% down and max 2 to 2.5x cash flow the statistical rate of default goes geometrically higher.

**kronk**

Frazzled wrote:
Both, depending on the area.

I'm not really talking about flipping, where you fix up a house then sell it, but as Fraz says, that was also part of the issue to some degree. All depends on the area.

Speculation was the bigger issue. Like buying a house in a popular area and hoping to sell it for more, immediately. Unfortunately, both approaches were hit hard by the eventual crash.

You had people with no idea what they were doing trying to "get in on the action" without realizing that the wheel would eventually stop spinning and someone would be left with the bad deeds in their hands.

**Frazzled**

You also had "direct" speculation wherein people would buy houses to live, that were substantially beyond their means (willingly or willingly), with the view that they could sell it in a year at profit or just walk away from it.

Evidently (after the time I was in real estate) balloon loans changed to where you paid a lower rate initially then it jumped a year or three after. You could make the payment,. but once that other hit, you couldn't afford the payment.

Other speculators could only afford the payments for a few months to begin with. If they couldn't flip it in 6 months, they were SOL. The property went back.

**Steve steveson**

There are up sides. My uncle put allot of money in to property and became a landlord despite knowing nothing about credit or being a landlord.

I, however, work in credit and at the time allot of my work involved chasing landlords so I had a good idea about my customers market. He told me repeatedly that "property always goes up" and "it's a brilliant way to make money". Both myself and my wife who is an accountant told him not to do it and that he was going to loose money, and that we felt that kind of venture was immoral as he was reliant on abuse of the housing market (houses go up in price due to the an artificial restriction on building so is not a free market). He told us that it was fine and his friend the estate agent (who he was buying from...) had told him it was a good investment. I laughed so hard when I found out how much he lost... Not very nice, but he chose to ignore the advice of two qualified people and tried to drag other family members in so I don't feel guilty.

**Grey Templar**

Wait a minute.

Wasn't this whole economic downturn caused, at least in part, by lots of risky loans in the first place?

Of course it was, so what up Obama?

**Ensis Ferrae**

Steve steveson wrote:
There are up sides. My uncle put allot of money in to property and became a landlord despite knowing nothing about credit or being a landlord.

I, however, work in credit and at the time allot of my work involved chasing landlords so I had a good idea about my customers market. He told me repeatedly that "property always goes up" and "it's a brilliant way to make money". Both myself and my wife who is an accountant told him not to do it and that he was going to loose money, and that we felt that kind of venture was immoral as he was reliant on abuse of the housing market (houses go up in price due to the an artificial restriction on building so is not a free market). He told us that it was fine and his friend the estate agent (who he was buying from...) had told him it was a good investment. I laughed so hard when I found out how much he lost... Not very nice, but he chose to ignore the advice of two qualified people and tried to drag other family members in so I don't feel guilty.

Honestly, I think that there are smart ways to make good money in real estate... I mean, look at the Trump. But, I think that too many people pre-bubble bursting were like your uncle: ie, they didn't know enough/ or anything about the system and how everything really worked, and were then stuck with in essence, bad property.

**Seaward**

hotsauceman1 wrote:
Y'know as a 20yr old, my biggest fear is not having credit at all, I need ot build it, but i have no money for it. So i can see where they are coming from.
But, I thought with weak credit you can still get a loan, just pay higher premiums and interest?

Sometimes it can, sometimes it cannot.

As a 20 year-old, you're not supposed to have much (if any) of a credit history, because unless you're some wunderkid, you shouldn't be able to afford the sort of gak you need serious credit for in the first place. Cellphone plans, power bills, rent payment on the crappy one-bedroom apartment you're supposed to be living in...those will all build it.

**Grey Templar**

Yup, and those are the "safest" ways to build your credit too.

Having a good job doesn't hurt either.

**Steve steveson**

Seaward wrote:
hotsauceman1 wrote:
Y'know as a 20yr old, my biggest fear is not having credit at all, I need ot build it, but i have no money for it. So i can see where they are coming from.
But, I thought with weak credit you can still get a loan, just pay higher premiums and interest?

Sometimes it can, sometimes it cannot.

As a 20 year-old, you're not supposed to have much (if any) of a credit history, because unless you're some wunderkid, you shouldn't be able to afford the sort of gak you need serious credit for in the first place. Cellphone plans, power bills, rent payment on the crappy one-bedroom apartment you're supposed to be living in...those will all build it.

Not exactly... Unless the US is radically different to the UK, and from what I understand it's not that different, apart from employers are able to look at your credit report (Which, for the record, I think is stupid).

Rent payments won't affect your credit rating (Unless you don't pay and they get judgment against you, but if you’re at that point your credit rating is the least of your worries). Two reasons for this, one rent is not credit, you pay it in advance and two, most landlords are far too small to be reporting to credit agencies if they did anyway. It is useful for referencing for future rental but that’s about it.

Phone and utility bills are good for taking the first steps as they can't refuse you very easily and the amount of risk is small to them because the values are small. However once you get past the first steps they tend to be weighted very low in company’s credit scoring engines for exactly those reasons.

The best way to build up a credit history is getting a credit card, use it to buy your weekly shop, and pay it off IN FULL EVERY SINGLE MONTH. If you are not adult enough to be trusted with a credit card then do not do this. If you think there is any chance friends will call you just before pay day when you have no money and you will decide to put it on the credit card do not get one. Do not use the credit card cheques they will send you. Do not use it to get cash out. If you can do this then you will quickly build a good credit history.

However, don't get card after card after card or keep upping the limit thinking this is good. You will quickly run in to what is called "over exposure". This is where you have too much money at risk. Basically the lender will look at your cards and say "they are paying it at the moment, and they are not using it, but if tomorrow they go on a crazy spending spree I will be screwed". Until you get older and settled I would go for no more than your monthly take home pay. Many people have more than this, but personally I think if you need more than this you should be looking at a loan as you are not going to be able to pay off the credit card on a sensible time scale.

Loans, yes, you will probably be able to get a loan of some sort if you have poor credit, but it may not be very large and it may have very high charges. There are loan companies in the UK specialising in loans to people with poor credit. They are normally less than £2k and have interest rates higher than credit cards, sometimes 100%+, up to 2000% for some short term pay day loans. At this end of the market they are little more than legal loan sharks.

TL

R To build credit get a credit card with a small limit and don't be stupid with it.

Now, if anyone want's a lecture on credit scoring engines or the immorality of pay day loans and the rental market I'll be working on doing my month end recs.

**Dreadclaw69**

Grey Templar wrote:
Of course it was, so what up Obama?

Well its not like he can run again next year so if he creates a mess he won't have to clean it up. Claim the credit from the lower/middle income families for making banks lend to them again, if it all goes belly up hope that it happens when you're out of office. Nothing like passing on a poisoned chalice to your successor

**kronk**

Ensis Ferrae wrote:

Honestly, I think that there are smart ways to make good money in real estate... I mean, look at the Trump. But, I think that too many people pre-bubble bursting were like your uncle: ie, they didn't know enough/ or anything about the system and how everything really worked, and were then stuck with in essence, bad property.

Certainly, but comparing what Trump and his ilk do to house-flippers is apples and oranges. Trump's company also makes huge fething buildings! He's also in the acquisition and resale business, but that's on a whole different scale!

Calling it house flipping is like calling John Stewart a little sarcastic.

**Frazzled**

kronk wrote:
Ensis Ferrae wrote:

Honestly, I think that there are smart ways to make good money in real estate... I mean, look at the Trump. But, I think that too many people pre-bubble bursting were like your uncle: ie, they didn't know enough/ or anything about the system and how everything really worked, and were then stuck with in essence, bad property.

Certainly, but comparing what Trump and his ilk do to house-flippers is apples and oranges. Trump's company also makes huge fething buildings! He's also in the acquisition and resale business, but that's on a whole different scale!

Calling it house flipping is like calling John Stewart a little sarcastic.

Trump has also declared bankruptcy mutliple times and routinely had a net worth less than your average teacher. Hold Trump up to be nothing but the power of Bull gak.

**Easy E**

hotsauceman1 wrote:
I just remember my Proffessor telling me how banks would give loans to people for houses they just couldnt possibly afford.

Yeah, that's what happened, but a lot of peopel still want to blame poor people for getting loans they couldn't pay back.

The interesting thing about Credit Scores in the US is that there are four credit bureaus. All of them are private businesses with little or no oversight. Each one has a different, secret method for calculating your score. So, when people tell you to do this, or do that, we are all really just making a best guess about thing sthat have worked int he past. All the actual formulas are top secret.

**Dreadclaw69**

Easy E wrote:
Yeah, that's what happened, but a lot of peopel still want to blame poor people for getting loans they couldn't pay back.

I blame them both. The people who couldn't do basic math to see that they couldn't afford it, and the banks who enabled them.