Is the government helping the middle class enough to buy a home?

Just as the housing recovery should be taking off, lenders are turning away potential home buyers by demanding unusually high credit scores and other tough standards on government-backed loans – exceeding the government’s own criteria in a bid to insulate themselves from financial penalties and lawsuits. The reluctance to lend has alarmed policymakers and heightened tensions between them and the industry as each side struggles to rectify the problem without exposing themselves to unreasonable financial risks. house7

As many as 1.2 million additional loans would have been made annually since 2012 if normal, pre-housing bubble lending standards had been in place, according to a recent analysis by the nonpartisan Urban Institute.

But lenders say the mixed messages they’re getting from Washington give them no incentive to widen access to credit. The government, determined to prevent a repeat of the irresponsible lending practices that sparked the housing bust, has forced lenders to buy back billions of dollars in loans and continues to trumpet massive legal settlements with the industry.

Fannie, Freddie and the FHA collectively own or back nearly half of all U.S. mortgages, according to Inside Mortgage Finance. None of them makes loans, though they are critical to making mortgages widely available.

Fannie and Freddie buy loans from lenders, package them into securities and sell them to investors. For a fee, they guarantee the mortgages and then pay investors if the loans default. The FHA insures the lenders it works with against losses if loans go bad.

Federal Reserve Chair Janet L. Yellen weighed in this summer, lamenting that “any borrower without a pretty pristine credit rating finds it awfully hard to get a mortgage,” which in turn has slowed the housing market’s recovery.

 

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