Don’t Return to the Go-Go Days

But do accelerate mortgage lending regardless of credit risk.  That’s the conflicting position Fed Governor Elizabeth Duke seems to be taking.

She doesn’t want to return to the days of easy mortgages that obtained in 2005-2006, a run of money that the graph below illustrates.

But she adds

But I also don’t think it would be a good idea to go back to the quite restrictive credit conditions of the early 1980s[.]


The Wall Street Journal points out that

[t]he drop in purchase mortgages—loans for buying a home rather than refinancing an existing loan—has been most pronounced among borrowers with low credit scores.  Originations have dropped by 30% for borrowers with credit scores above 780 between 2007 and 2012, but they’ve dropped by 90% for borrowers with credit scores between 620 and 680.


[T]he trend…”has disturbing implications for potential new households” because younger borrowers typically have credit scores that are more than 50 points below older borrowers[.]

What does this mean?  It means that poorer credit risks have a harder time getting loans than better credit risks.  What’s the downside of that?

Is Duke still holding out for the CRA debacle that anyone should be able to get easy credit for no better reason than that they exist?

The problem, says Duke, is that the economy may actually be worse off if the pendulum stays stuck at too tight….  The ability of newly formed households that are more likely to have lower incomes and credit scores to get loans “will make a big difference in the shape of the recovery[.]  Without first-time homebuyers, the move-up market will be sluggish, new and existing home sales will be more subdued, and purchase mortgage volumes will return only slowly.”

But this is a static view.  A dynamic analysis shows pretty clearly that this is just a path to a new equilibrium, at which point the pipeline of first-time buyers will be back at a “normal” level; they’ll just be older, with better incomes, and with those two characteristics established, more stable, and so better, credit risks.

Owning a home is certainly the American dream, and it remains a worthy dream.  But it’s not an inalienable right.  Those who work hard, develop good credit—and manage their finances so as to maintain that good credit—do get mortgages today.  Those who don’t haven’t done anything to earn the same rewards as those worked hard.

It’s just that simple.  Even a Federal Banker ought to be able to keep up with that.

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