Opinion: ​Easing credit scores to fuel lending

By: Ken Maes and originally posted on BizJournals.com

Have you seen the movie “Groundhog Day” with Bill Murray?

ken-maes-groundhog-postIf so, you know where I’m going with this. In this column, we’re going to talk about the government insanity unfolding right before our eyes. Albert Einstein described insanity as “doing something over and over again, and expecting a different result.” To see how this applies to us, let’s journey back to the late 1990’s.

President Clinton presided over an economic boom, driven largely by falling interest rates. In January 1993, the average 30-year mortgage rate was 8.02 percent, according to the Federal Home Loan Mortgage Corporation By 1999, rates had fallen to 6.79 percent due to the rapid rise of home prices, the average homeowner could claim up to 45 percent equity.

In 2000, during President Bush’s election, one of his major themes was to create an “ownership” society, where he said we could “put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.”

Congress stepped in, applying pressure on FNMA, FHMLC and FHA to lower credit standards to help the ownership dream become reality.

I think you know the rest of the story. What followed was a nightmare housing bubble and the “Great Recession,” as easy money allowed a rush of buyers with bad credit to apply for and get homes. Six years later, we’re still struggling to recover.

A snapshot of Portland’s housing market

Let’s take a quick status check of the Portland area housing market:

  • The Portland area grew at an annual rate of more than 11 percent in 2013.
  • Home equity loans are going up due to rising home values.
  • The inventory is low, with Portland ranking eighth lowest in the nation.
  • Rents are at the highest levels ever, triggering a bigger demand for homes.

The Obama administration says it has a great solution to those low inventories, and high home prices: It wants to lower credit standards.

What? That’s the “solution” that imploded the housing industry in 2008.

It’s important we all understand the real reasons behind the growing housing market: artificially low interest rates and low inventories of homes. There are fewer buyers because of the 2008 housing crash, and its devastating fallout.

Why we’re not in a true recovery

To clarify, this is not a true housing recovery because stable, full-time employment is not being created to drive a real housing recovery. I like to refer back to the era of big hair-big interest rates: the 1980’s. Back then, the U.S economy created 19 million jobs despite the fact the average interest rate over that 10 year period was 11.67 percent. In contrast, in the lost decade of the 2000s, there was net zero job creation, and the average interest rate was 6.29 percent.

For the past three years, the Obama administration has been pressuring the credit industry to loosen up standards to “help” borrowers with accounts that have turned into collections for unpaid medical debt. The result: borrowers will see their credit scores improve by up to 25 points, allowing them to qualify for mortgages, car loans and credit card debt—all of which they can’t afford.

The pressure appears to be working. The model that’s used as the standard bearer in the industry is the FICO score. FICO (Fair Isaac Corporation) is actually a private firm based in San Jose, California. It developed the model that gives people credit scores ranging from a low of 300, to a high of 850. The government has convinced this private firm to “improve” its tool, so that many borrowers with delinquent accounts will see their score increase up to an additional 25 points.

What, me worry?

How does this affect you, or to quote the vintage Mad Magazine phrase, “What, me worry?” Yes. Worry. All the factors are falling into place for yet another housing correction that can start a domino effect of bad news in our economy. We can all avoid that by remembering to:

  • Buy a home today for your lifestyle, not a short term investment.
  • Be patient; prices will fall.
  • Look into remodeling, a fairly inexpensive way to get a bigger home.

My family has built a business on helping people realize the dream of home ownership — but only if they can afford the payments. When people buy goods and services they can’t afford, it not only further destabilizes their finances—but also our country’s. Lowering lending standards to include borrowers who have credit issues is nothing but insanity — again.