Actually, Things Aren't All That Loose

Last week, we mentioned that Fannie Mae and Freddie Mac introduced a new program to buy mortgage loans with down payments as low as 3%. For borrowers to qualify for 3% down they'd need a FICO score of at least 620. They'd also have to prove their income, assets and job status, and purchase private mortgage insurance. Of course, this is all within the norm.

Fannie and Freddie's new mortgage program inspired a spurt of head shaking and finger wagging from media outlets : Could low down payments lead to another housing boom and bust? Could another mortgage bubble form?

We don't see booms and busts or bubbles in our future. For one, housing sales and purchase mortgage financing is still muted from a historical perspective. Lending standards are still high, and you can argue still too high. (Fed Chair Yellen stated that she was surprised that the housing recovery has not been more robust and indicated that it is because of tight credit markets.) This is reflected in the dearth of first-time home buyers. The NAR reports that first-time home buyers account for just 33% of all home purchases. That's the lowest level in 27 years.

Given the strength in employment and the economy, there is no reason for lenders not to reach out on the risk curve. There is also no reason for regulators to dissuade lenders from not extending credit to riskier buyers – if intelligently done.

Most of us vividly remember what occurred in 2008 and 2009, so everyone is sensitive to market disconnects. Are lending standards too loose? Not by a long shot. The benefits of easing credit standards far outweigh the risk of another bubble at this point in the recovery.

Information provided by Jessica Regan.

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