Washington: Strict Lending Standards Not Budging

By Heather Munro | Comments

After the housing crash, measures were erected to prevent a similar collapse from occurring. Unfortunately, these actions include barriers to financing that are negatively impacting first-time homeowners today. Young people with steady incomes are not being approved for the loans they need to purchase their first homes, largely because of overly cautious measures designed to prevent the next real estate bubble.

The lending standards currently in place do not help renters to become homeowners, but rather, federal budgeters. Although there is pressure from the public and from some who work within the industry to change the lending standards, there is no indication that they will anytime soon.

Why Are Strict Lending Standards Here to Stay?

For one thing, a survey of the top housing economists and experts revealed that there is an almost 50/50 split between those who say that lending standards are too strict versus those who say it’s just right. It’s not possible to take cues from the experts when they are so evenly divided, and this divide runs all the way to Washington, where authority to make major changes would be derived.

While everyone agrees we don’t want a repeat of the 5 million foreclosures we saw in 2006, many also agree that we’ve gone too far in restrictive lending policies. By 2010, many economists felt that it was acceptable to loosen standards and allow for a bit more risk, which would be balanced by the benefits of more homeowners, but that has not happened.

In simple terms, the current lending standards state that anyone paying over 43% of their income toward debt is not qualified for a mortgage to buy a home. While this may make sense to regulators, lenders now err on the side of caution and bump that percentage up to 37%, which prevents many people, who would qualify in the eyes of the government, from getting approved for loans.

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