June 4th, 2013 9:13 AM by Michael and Jill Kohler
A major cause of the housing crash in 2006 and 2007 were poorly documented mortgages and very loose lending standards that contributed to the 4.9 million defaults that ended up in foreclosure, costing families their homes.
Mortgage lenders who made bad loans paid dearly with massive losses that drove some, like Countrywide and Washington Mutual, out of business. The survivors changed their lending practices dramatically, raising standards on credit worthiness and ability to repay, and requiring better documentation. The result is that many homeowners who qualified for a mortgage to buy or refinance a home in 2005 could not qualify today.
With the housing recovery underway, pressure is growing to loosen credit, debt and income requirements. Currently, for example, the percentage is in the 50 percent range. Economists at the National Association of Realtors estimate that an additional 500,000 to 700,000 home sales could be made if credit conditions returned to normal.
Some policy makers, led by Fed Chairman Ben Bernanke, have repeatedly urged lenders to lay down the law on the tight lending standards that have made it difficult for home buyers with moderate credit and income to qualify for mortgages.
“Certainly, some tightening of credit standards was an appropriate response to the lax lending conditions that prevailed in the years leading up to the peak in house prices. Mortgage loans that were poorly underwritten or inappropriate for the borrower’s circumstances ultimately had devastating consequences for many families and communities, as well as for the financial institutions themselves and the broader economy,” Bernanke said in December.
“However, it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”
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