Now it is difficult for most of the Americans to get a home loan, because the banks are extremely cautious when they are considering offering a loan to someone due to the financial crisis of 2008. However, Recently, the Obama administration asks banks to make home loans to borrowers with weaker credits. They are doing this in order to help young people looking to buy their first homes and individuals with credit records weakened by the recession. And it is more important to promote the economic recovery. (Goldfarb, 2013)
Administration officials are trying to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs. Federal Housing Administration and the Obama White House are working to develop new policies to make clear to banks that they will not face legal or financial recriminations if loans that conform to the program’s standards later default. Also, they are encouraging lenders to use more subjective judgment in determining whether to offer a loan, such as looking at a borrower’s overall savings. (Goldfarb, 2013)
The skeptics argue that we should learn from recession in 2008. Risky lending will sow the seeds of other house bubble and credit crisis.
Looking at the recession that happened in 2008, the primary reason of this recession was the house bubble, which led to credit crisis. There are several primary causes of the house bubble:
(i) Low mortgage interest rates. Mortgage interest rate were falling despite the low saving rate in the U.S. because of an influx of saving entering the U.S. economy from other countries. Mortgage interest rates in the U.S. peaked at 18 percent in 1982, then they fell over the next 20 years. The rate stayed below 6 percent most of the time though 2005. Most of the saving came from countries with high saving rates such as Japan and the United Kingdom, and countries with rapidly growing economies such as China, Brazil, and etc. Investors in these countries sought investments providing low risk and good returns. They focused on mortgage-backed securities, because these securities appeared to be low-risk. Eventually, the number of foreign investors grew rapidly; investing in mortgage-backed securities issued by Wall Street firms, and the mortgage interest rates kept low. The low mortgage interest rates contributed to the house bubble by keeping the monthly mortgage payments affordable for more buyers even as the house prices rose. (Holt, 2009, pp. 121-122)
(ii) Low short-term interest rate. From 2002 to 2004, the Federal Reserve lowered the federal funds rate eleven times in order to recover from the recession in 2001. The rate remained at 2 percent or lower. The low short-term interest rates contributed to the house bubble in two primary ways. First, the low short-term interest rates encouraged the use of adjustable rate mortgages. ARMs could provide the buyers a lower monthly payment since…