published Thursday, June 9th, 2011

More irresponsible lending

Some years back, it was common to hear accusations that it was too hard for low-income Americans to get loans to buy houses. There were even accusations by civil rights groups that home loans were regularly being denied based on race.

Over time, lending standards got looser. Down payments often were not required. People with poor credit got “subprime” loans at adjustable rates.

Under pressure from the federal government, government-sponsored Fannie Mae and Freddie Mac bought up massive numbers of risky home loans from the banks that had originally lent the money.

Soon, however, adjustable-rate mortgages started “adjusting” upward, putting the monthly payments out of reach for many people. As a result, over the past few years there have been record numbers of home foreclosures, leaving the foreclosed buyers in worse condition than if they had never been given a loan they couldn’t afford in the first place. The housing collapse was one of the major causes of the recession and of our current high unemployment, which rose in May to 9.1 percent.

But once all the foreclosures started hitting, some of the same groups that had accused lenders of denying loans to the poor began accusing lenders of giving too many loans to people with weak credit. They said borrowers had been tricked into taking loans with unfavorable terms.

Whether those claims are right or wrong, you might think this whole painful experience would have convinced everyone that making too-large home loans to people with risky credit histories is a bad idea.

But some groups are now pushing for even more shaky lending.

“... [A]s banking regulators are rewriting the rules for the mortgage market, unusual alliances have sprung up in opposition to tighter lending standards,” The New York Times reported. “Advocacy groups like the NAACP and the National Council of La Raza, a Latino civil rights organization, on the one hand, and the American Bankers Association on the other, are joining together to fight rules they say could make home loans less affordable for minority and working-class Americans.”

If Congress decides to overhaul Fannie Mae and Freddie Mac, “the same groups could voice similar concerns over anything that restricts the availability of credit for first-time home buyers,” the newspaper added.

We’ve seen millions of Americans lose their homes because they got mortgages they couldn’t afford, yet now there is talk of handing out new irresponsible loans!

Apparently our nation has not yet learned its lesson.

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nucanuck said...

If we don't increase debt levels, we will contract, but since we have apparently reached a debt saturation level, the only course left IS contraction. Contracting, reducing spending, means reducing jobs. Fewer jobs means fueling the contraction.

It appears that we are at the end of growth and will now have to adjust to flat or even negative growth for many years. Flat is actually a good thing if you have no debt and no increase in the money supply.

To get to flat we will have get out from under our existing debt and that will not be quick or easy, but that is the only real choice we have.

Any other thoughts out there?

June 9, 2011 at 1:25 a.m.
nucanuck said...

L4F,

I think you misunderstood my post. I am in no way advocating borrowing increases. Recent added debt temporarily avoided a bigger economic decline without re-energizing the economy.

My point was/is that, as we withdraw the borrowing, the inevitable contraction will increase unemployment and misery in general. The virtue of fiscal restraint may be good for us, but hard times will accompany that virtue.

June 9, 2011 at 12:19 p.m.
brokentoe said...

Out of control adustable rate mortgages or ARMS led to the housing collapse more so than giving home loans to low income citizens. This not only happened to the poor working classes, but upper middle classed and even wealthy Americans too. Those low mortgage rates were enticing and seductive until those rates ballooned and adjusted 2-5 years down the road and the homeowners monthly payments doubled, triped and sometimes quardrupled.

Last I read there are millionaires now sleeping out of their cars and living in tent cities because they lost their homes in the ARM scam.

June 9, 2011 at 1:49 p.m.
nucanuck said...

L4F,

I don't disagree with your optomistic assumptions, but I see no way that happens until after a debt/deleveraging period that I assume will take years because of the size of the debt overhang.

Add to that the fact that our debt addiction has no political solution in sight and you can understand why I say we have at least six rough years ahead.

June 9, 2011 at 4:08 p.m.
Mila78 said...

I am sure there should be strict requirements for those who are going to apply for a mortgage. No, not because it’s necessary to make housing unaffordable. Housing should be affordable but it’s necessary to avoid another mortgage crisis. Losing a home is painful. And to avoid this pain consumers should take out loans they really can afford. If a loan applicant has an awful credit, drown in debt how is it possible to approve this person for a home loan? Lots of consumers use personal loans and http://northenloans.ca/no-credit-check-loans.html and don’t pay them but these loans are small. So how can such people pay down their home loans? It’s necessary to protect both borrowers and lenders from the consequences of irresponsible lending.

June 6, 2013 at 8:17 a.m.
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