Maybe this time around lenders might get it right. Lenders are not jumping at the chance to originate more loans by using lower underwriting standards (Standards). It seems as though lenders may, at least for now, have learned their lesson the hard way. Last time we took this approach, loosening the credit standards to increase homeownership, lenders got burned, and burned bad! The industry suffered and the economy took it hard. Maybe this time we’ll tread just a little more carefully into this arena.
Although homeownership and related lending, is trending down, the answer may not be to loosen credit standards to potentially increase homeownership. This just puts some people into housing they can’t afford which will hurt the overall housing recovery.
Increasing homeownership by reducing credit standards is not the answer. Some people are just not quite ready to buy at this point, especially Millennials. They have other priorities like education, employment and student loans.
As I wrote in an earlier post, this generation takes a little longer to do things. So, easing credit standards may not bring this generation of buyers to market. Although it may make loans more accessible, it does not necessarily make them more affordable. Those who may qualify under the new credit guidelines may have the desire to buy a home, but not have the financial capacity, nor the requisite knowledge, needed to become a responsible home owner. Couple that with reduced down payment requirements, like those announced by FHFA, and you have a recipe for another disaster. This not only hurts the housing recovery but the consumers as well. Hopefully we have learned. It seems so…at least for now.
But what happens when those first few lenders begin offering loans at the reduced LTV and eased credit standards? Your loan originators start to complain they are losing business to the competition because you won’t allow such lending programs. Will you hold your ground? If you don’t, you had better look very carefully before you leap. You may find “the risk ain’t worth the reward”. Be careful my friends.