Loosening Credit Standards: Bad, or Good?

Recently, the Federal Housing Finance Agency and the Federal Housing Administration have made a few policy changes to help revitalize the real estate market; namely, they are calling for lenders to relax credit standards a bit so that new buyers can purchase homes, which will in turn give the economy a big boost. But some people are worried that loosening credit standards might be a bad thing and that it could lead to unqualified buyers seeking foreclosures down the road. Are these fears founded, or unfounded?

Several years ago, when interest rates went high and the real estate market collapsed, the economy suffered quite a bit. To get us out of that tail-end of the recession will require nudging various industries, including real estate, into jump-starting the economy by creating construction jobs, giving paychecks to real estate professionals, and getting buyers into homes so that others can sell their homes. All business transactions are good for the economy. However, these types of regulations may not make too much of a difference, positive or negative, on the current real estate market.

Even with interest rates being extremely low, there just aren’t enough people seeking to buy homes.  lending standards are already considered fairly liberal compared to what they were a few years ago. Even if you made credit standards looser, there still would not be enough people seeking homes and loans to make a huge dent in the problem. The real problem is that wages are staying low while home values are skyrocketing, making it a great time to be a seller or a buyer with a great income.

Right now, a qualified mortgage must meet the requirements of the Consumer Financial Protection Bureau. Credit must also be considered to make sure the buyer can repay the loan. Even if standards are reduced, it will take some time for any effects to be felt at all.

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