Since the financial crisis in 2008, many borrowers – especially those with less-than-perfect credit – have had a hard time qualifying for mortgages and other loans, with many banks and lenders nervous about repeating history. While its understandable why these institutions are remaining cautious, the Federal Reserve has encouraged more lending with low interest rates in attempts to increase borrowing and lending, and a quicker economic recovery.
Most recently, the Obama administration has encouraged banks to look more into first-time borrowers or those with poor credit. While the intention is to help those who are being currently overlooked, some financial experts are worried this will only lead the economy back into a similar housing bubble.
An article in the Washington Post said that government officials are encouraging banks to use government-based programs to reach out to borrowers with riskier credit. At the same time, financial institutions are asking the government for legal reassurances that loans made to riskier borrowers won't hurt them. But an article in the Atlantic reminds us of the effects of lending to borrowers who aren't able to pay back their loans, which was most drastically seen in 2008. Additionally, the article asked, who is most qualified to determine the riskiness of a borrower: the lender, or the government?
"But the notion that the federal government is a good judge of who can be given home loans without undue risk of widespread default has been rather spectacularly disproved in the very recent past," author Conor Friedersdorf wrote.
Instead, he suggested policies, such as tax credits to renters or including more multi-family buildings in major cities, be created. But banks too can use risk management tools to prevent another housing crisis of appearing. With loan processing software and risk assessment tools, lenders can make more qualified decisions regarding borrowers, both expanding the number of loans originated while also avoiding future delinquencies.