Mortgage lending is loosening – Is that really a good thing?

House and CalculatorThere’s been a lot of chatter recently about Melvin Watt’s announcement that the government is working to loosen mortgage lending standards for Fannie Mae and Freddie Mac backed loans. Most real estate agents and lenders I’ve talked to are excited about this idea. Are they just looking at the fact that it will be easier to sell a house a write a loan, or do they really think loosening mortgage standards is what is best for the consumer?

I love the idea of making more people home owners, and helping people build wealth (in the form of equity). However, not everybody is in position to be a home owner, and I’m not so sure loosening lending criteria is a good thing. Homeowners need to be capable of saving money for future repairs and maintenance items. This means they need to spend less than they make. If they are capable of that, they should have also be capable of saving a few bucks for a down payment, they should have an emergency fund, they should have minimal other debt payments, etc.

Have we learned nothing from the recent housing market crash? Part of the problem that created the downturn in housing was that lending got to loose, consumers bought more house than they could afford, and mortgage defaults ramped up. Consumers blamed the banks. Banks blamed the government for backing the mortgages that shouldn’t have been made. Many consumers should have blamed themselves for buying too much house and poor money management.

I fear we are going to repeat the cycle if the government chooses to loosen mortgage requirements. My recommendation to consumers is to educate yourself financially, plan a budget, and make a wise decision on how much house to purchase (or if you are even in the position to purchase). Don’t just accept what the lender tells you about how much money they are willing to give you.  Don’t just follow your friends into the world of being buried in debt payments. Buy conservatively, and get yourself in a positon where you aren’t stressed out to make your mortgage payment every month.


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