Housing Recovery Gears Up, But Credit Availability Still A Challenge

In this still fledgling housing recovery we’ve seen an increase in prices and a slow desaturation of the REO market, but credit availability is still a challenge for many. October’s housing prices saw an increase of 4.6 percent while REO saturation shrunk by 23 percentage points from its p.eak in 2009, according to report by Clear Capital. That’s good news, but it won’t be enough to kick the housing recovery into full gear. To do that, we need to loosen up credit availability for the average homebuyer.

Right now, those buyers with high credit scores can easily find mortgages with decent interest rates. However, homebuyers who’ve had recent financial troubles could find conventional mortgages inaccessible and alternative funding costly. Below are three solutions that could help solve this problem:

1. Lenient lending standards.  While we shouldn’t return to the bad days of “no-doc” loans, we do need loans available to buyers who’ve experienced foreclosure (and other financial problems) during the housing bust. These types of loans should take into consideration other factors when a borrower’s low credit rating seems too risky.
2. Lender incentives.  Mortgage companies need a good reason to lend to buyers with less than perfect credit.  We need incentive programs that reward lenders for taking on borrowers who are responsible but have a low credit rating.
3. Lender protection.  While the government should proceed with caution, helping protect lenders from at least some of the problems associated with high-risk borrowers could improve credit availability.

Whatever solutions we employ, credit availability needs to improve quickly if we want to see a robust housing recovery in the next few years.