Wednesday, April 17, 2013

Risky Business

By Luis Villanueva

     Sub-prime lending contributed to the housing bubble and today President Obama and the CFPB (Consumer Financial Protection Bureau) are pushing banks to begin lending under lenient regulations; this seems to be a potential repeat mistake.   Prior to the housing bubble, one of the reasons for sub-prime lending was used to decrease discrimination and now today that theme has come back. The President and the CFPB’s goal are to prevent lending discrimination, but in doing so they are increasing the risk of loan defaults. With a push in sub-prime lending in the Fresno market, it means more potential buyers would be approved in a market that is in short supply of product.

     In a recent article by Investor’s Daily they state “CFPB recently released new mortgage rules that, despite claims of tightening standards, require no minimum credit scores or down payments, and even allow checks from "government assistance programs" as qualifying income.” Among the change in rules the CFPB are also increasing their monitoring of possible discrimination by lenders on denying borrowers under “qualified mortgages”. By doing this it seems that the CFPB and President Obama are putting pressure on lenders to qualify borrowers for mortgage loans when they really should not be qualified. This seems similar to before the housing fall when there was a push to increase home ownership.

     One of the subjects that attributed to the economic crisis of 2008 was the sub-prime market, which was originally implemented to increase home ownership. Sub-prime lending helped low-income families get approved for mortgage loans by lowering requirements. As discussed in Real Estate Analysis Environments and Activities, the problem with sub-prime lending was that when the economy began to fall sub-prime borrowers were unable to pay their mortgage. By pushing for sub-prime lending the President is increasing the risk factor associated with qualifying borrowers. With an increase of barely qualified borrowers it is sure to affect the markets on a local level.

     According to the supply and demand cycle of real estate increased demand can lead to a temporary increase in prices until supply is added to the market. This seems to have a positive effect on the housing market since it would increase the flow of the local market. However if the economy was to decline in the future it can be detrimental to sub-prime borrowers, as seen in the past. The fact is that sub-prime lenders barely qualify, and if the economy were to go bad then sub-prime lenders would be among the first borrowers to default on their homes because they have no financial cushion.

     To conclude sub-prime lending was not the only reason why the economy greatly declined a few years ago, but it was one of the contributing factors. The United States is still recovering from the Great Recession and the encouragement of sub-prime lending may not be the best idea right now.

"Acorn Clones Advising President's Credit Police." Investor's Business Daily. (April 12, 2013 Friday ): 1544 words. LexisNexis Academic. Web. Date Accessed: 2013/04/14.

Diaz, J., & Hansz, J. A. (2010). Real estate analysis, environments and activities. Dubuque: Kendall Hunt.

"Washington: Another Subprime Idea from Obama." US Official News. (April 5, 2013 Friday ): 552 words. LexisNexis Academic. Web. Date Accessed: 2013/04/18.

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