Are Lending Regulations Too Strict?
To lenders that have tightened the lines of credit they extend to borrowers and made greater use of tools like risk assessment software, their cautionary behavior seems justifiable in the wake of the housing crisis of the late 2000s.
So how is it that some observers believe that these measures represent an “irrational restriction” of credit that could actually produce more far-ranging consequences than those that followed after the bubble burst?
Lewis Ranieri — a prominent industry voice — delivered this warning during his comments at the annual conference of the Mortgage Bankers Association earlier this week.
“The most truly unacceptable legacy of the market collapse is the legacy of the irrational restriction and contraction of credit that we have today,” he said. “Fear and not fact is making credit tighter than it should be.”
Ranieri’s comments follow a similar line of thinking expressed by Fed chairman Ben Bernanke, who has claimed that the “pendulum has swung too far the other way,” toward lenders being overly strict with their credit standards. Bernanke believes that creditworthy borrowers are being obstructed from homeownership.
While Ranieri and Bernanke’s comments do hold some water, the reality is that homeownership rates, currently at 65 percent, have only dropped about 6 percent from their peak June 2004 of 69.2 percent, according to census data.
Can lenders justify that slight dropoff?
Probably, given the far less appealing alternative — another housing bubble brought on by limited standards for assessing credit risk. Lenders have learned their lesson and they’re frequently turning to risk assessment software to make determinations about borrowers.