Asymmetrical Information - Megan McArdle

04.03.13

The Obama Administration Wants Banks to Stop Being So Uptight About their Mortgage Underwriting. How Crazy is That?

Here we go again

This morning, the Washington Post reports that the administration is pushing for banks to loosen their lending standards in order to make more home loans to buyers with poorer credit and lower incomes.  If you're anything like me, you probably said to yourself, "Oh my stars and garters!  What sort of daffy wisenheimer came up with this crackpot scheme?"  

Seven years on, we're still marinating in the hangover of our last attempt to make the boon of homeownership available to people who can't really afford a home.  Why on earth would we do this again?

I'm not sure it's quite as crazy as it sounds.  The administration seems to be making the basically fair argument that banks are putting all their energy into refinancings, made attractive by the low-low rates currently on offer at the Federal Reserve.  It's nearly impossible for someone with a credit score below 680 to get a mortgage.  A 680 credit score is not "deadbeat" territory; it's someone who's had trouble in the last few years, but is now current on everything.  

On the other hand, it's not exactly clear how far the administration wants to go with this.  "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" says an anonymous official, which is entirely sensible, but rather vague.  How small a downpayment would they like buyers to qualify with?  How low a credit score?  That stuff matters, because the banks no longer have the capability to do the kind of detailed manual underwriting that they used to do in years past.  They are going to go by whatever numbers the administration gives them.  

But why should the administration be giving them numbers?  Isn't that what caused the problem in the first place, ask conservatives who believe that government regulations were primarily responsible for the crisis.  

Fair point (even though I don't think that governmetn regulations were primarily responsible for the crisis.)  It is not a good idea for the government to be telling banks to lower their borrowing standards.  

But at this point, the government essentially is the mortgage market; the overwhelming majority of loans now go through an entity controlled by the US government.  So the government is going to set the underwriting standards.  The question is, will they set them too high or too low?  

It's not clear.  But in the humble opinion of this correspondent, it should err on the side of "too high".  Renting is not some sort of calamitous tragedy that the government needs to prevent from befalling our young and moderate-income citizens.  And if the government consistently ignores solid, creditworthy buyers, perhaps some enterprising bankers will step in and, I dunno, make a market or something.