Is It Time for Banks to Ease Up on Credit Restrictions?

A story in The Washington Post last week has some economist scratching their heads. It reported that the Obama administration is urging banks to ease up on credit requirements and make home loans more available to people with weaker credit.

Wait, isn’t that what caused the problem in the first place?

Many experts think so, including Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

He told The Washington Post, “If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from.”

Nevertheless, the Washington Post reports that the Obama administration is engaged in efforts to push banks to make more home loans available to people with weaker credit. It is necessary, administration officials say, to get the economy moving again. They say there is a rebound, but it is leaving too many people behind, such as people looking to buy their first homes and individuals whose credit records have been weakened by the recession.

Since banks are hesitant to do so in the wake of the housing collapse, they are being urged to push taxpayer-backed programs, such as those offered by the Federal Housing Administration, which insures home loans against default.

Banks, however, are still a little gun shy. Having faced investigations for making sub-prime loans, and being largely blamed for the circumstances that led up to the mortgage crash in 2008, they are mostly sticking to the 700 credit score requirement, The Washington Post reports. Under certain circumstances, the FHA can retract its insurance and take legal action against the banks. As a result, the Justice Department is being urged to provide assurances to banks that this won’t happen this time around.

What do you think? Is this a wise move and necessary to get the economy moving again? Or does it run the risk of setting up for another housing bubble like the one that contributed to the crash last time around?