The Washington Post reported today that the Obama Administration is pushing banks to make home loans to individuals with weaker credit. The idea is that by freeing up credit it will boost the economy by creating jobs (construction, real estate, etc.) and releasing cash flow to the open market. I empathize with the idea, but it’s only a short term fix that will eventually lead to a revolving door of heartache.
For one – this is exactly the “solution” that caused the first housing bubble and eventual meltdown. Banks made “risky” investments in individuals who had absolutely no business receiving a home loan (weaker credit). It seems simple: if a borrower has a history of poorly managing their finances why should a bank entrust them with the largest sum of money they are likely to receive in their entire life?
Loaning Money is a Business Decision
Loaning money to potential homeowners is a business decision. The bank has to evaluate the risks based on data (credit score, ability to pay the debt). So why exactly is the Obama administration encouraging banks to make the same risky investments based on faulty assumptions as they did before? I, for one, certainly do not want another bailout situation – especially one paid for by tax dollars and encouraged by the Government.
In fact, I would argue that Government should stay out of the business of “business” all together. Let the market decide who receives a home loan and who does not. Ultimately it is up to the individual and the bank to decide if the deal works for both parties. And if it doesn’t – then renting is always an option. (By the way – renting isn’t throwing your money away!)
Fool me Twice
Instead of following the same bubble-to-burst economic policy the Government has encouraged in the housing market before perhaps we should learn from our previous mistakes and let banks make good business decisions. In my opinion, if banks are playing it conservatively right now and only loaning to home-buyers with phenomenal credit – then more power to them!
If my entire industry had crumbled before my eyes I might be apt to play it a little safe too.
Side Rant – Home Ownership is not a Right
One more thing: Home Ownership is not a right. In fact, home ownership probably isn’t right for a lot of people. It is a commitment that will likely outlast your marriage, your job, and almost anything else – so making the statement “everyone has the right to home ownership” is kind of a broad way to say “everyone deserves the right to make a hasty commitment”. (Despite what the self concerned real-estate agent says.)
For some reason renting has been demonized. Renting has some sort of stigma attached to it like only poor-drug-addicted-lepers with horrible credit are doing it. The truth is – when you let the market do its job – there should be almost no financial difference between renting and owning a home. In fact, renting can be a better investment all together.