The recent financial downturn caused many financial institutions to significantly tighten their lending restrictions, and understandably so. But as the economy continues to improve, many are once again loosening them, with the exceptions of those which grant home loans.
Mortgage lending standards have remained particularly tight even as those for other lines of credit have slackened appreciably, likely due to both the lingering uncertainty in the housing market and also the large investment lenders must make in consumers to fund this type of financing. But now, more experts are saying that mortgage lending restrictions are actually too tight, and may be creating problems within the economy, according to a report from the Philadelphia Inquirer.
Tighter lending standards mean that consumers will need higher credit ratings than they would have needed a few years ago, and many institutions are also requiring more sizable down payments as a means of mitigating risk, the report said. But in both cases, this could shut out many consumers who are ready and financially capable of borrowing to finance a home purchase, and would also be responsible in paying back their balances. Further, many critics say that these restrictions might not have the intended effect that banks think.
“Down-payment standards are not enough to prevent another housing meltdown,” Mark Zandi, chief economist at Moody’s Analytics, told the newspaper. “Most important to preventing bad lending (including mortgage lending) are higher capital ratios and tougher liquidity requirements for banks and other creditors.”
In fact, these tighter standards may be having the unintended effect of hurting the economy, as it prevents borrowers from building equity with a new home, and has prevented builders from being able to start construction jobs, the report said. Some organizations have even cautioned that lending standards are so restrictive that they are what prevents the housing market from having a more robust recovery.
Consumers have been trying to gain access to all types of new credit and lenders have generally been willing to oblige over the course of the last year. But a recent survey of major financial institutions found that most believe they will not have nearly enough credit available in the form of home loan financing to meet consumer demand, despite having excess credit for other types of loans.