Obama Administration Pushes Banks to Extend Home Loans To People With Weak Credit

President Barack Obama. (Getty Images.)

The Obama administration is pushing banks to extend home loans to people with weaker credit, an initiative that the White House says will help fuel the recovery but critics say will lead to the type of conditions that caused the financial crash of 2008.

“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,” Zachary A. Goldfarb writes in the Washington Post.

The Obama White House explains that by taking advantage of taxpayer-backed programs that insure home loans from default, banks should be able to provide loans to a greater number of borrowers.

Cautious of the White House’s initiative, banks have secured assurances from housing officials that they won’t be held responsible for government approved borrowers who default on their loans.

“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,” the WaPo notes.

Question: How does one “use more subjective judgment” in approving a loan when the criteria for approval is set by a third party (i.e. the feds)? Also, doesn’t “subjective judgment” become a little clouded when the loan approval process involves potential legal ramifications?

Critics are understandably leery of the White House’s call for broader lending.

“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,” Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae, tells the WaPo.

The Obama administration downplays these concerns, saying that it is only looking to speed up the approval process and “encourage safe lending to borrowers who have the financial wherewithal to pay,” as Goldfarb puts it.

“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,” a senior administration, who spoke on the condition on anonymity, tells the WaPo.

From 2007-2012, new-home purchases have declined by 90 percent for borrowers with credit scores in the 620-680 range (decent scores), the report notes.

Administration officials argue that because borrowers in this range are being turned down for home loans, they are forced to rent, which means less construction and a slowdown in the housing industry – which means a slowed recovery.

“The FHA, in coordination with the White House, is working to develop new policies to make clear to banks that they will not lose their guarantees or face other legal action if loans that conform to the program’s standards later default,” the report notes.

“The effort requires sign-on by the Justice Department and the inspector general of Department of Housing and Urban Development,” it adds.

Exit Question: We’re conflicted. We can’t decide if this story should be filed under “You’re kidding me” or “What could possibly go wrong?”

Click here to read the Washington Post’s full report.

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