The Obama administration is working to boost mortgage lending to borrowers with less-than-perfect credit, using a coordinated effort among federal agencies and lenders, the Washington Post is reporting.

The effort, as described by Washington Post report Zachary Goldfarb, comes at a time when the housing market appears to be recovering yet many potential buyers remain on the sidelines. These include young people who normally might be buying their first homes and others whose credit took a hit during the downturn.

Administration officials are seeking to reassure lenders that that they will not be penalized for issuing mortgages through the FHA or other government-supported programs if those loans later default, provided they have followed program guidelines.

Lending sharply reduced for mid-credit borrowers

Historically, consumers with FICO credit scores in the 620 to 680 range have been considered reasonable credit risks for a mortgage. Such borrowers would typically pay higher interest rates than those with stronger credit, but generally could still qualify for a mortgage as long as they could handle the monthly payments and make a modest down payment.

Since the downturn, however, mortgage lending has nearly dried up for this group of borrowers, whose numbers have increased significantly due to the downturn. According to figures cited by the Post, since 2007 new-home purchases in that group have fallen by 90 percent, compared to a 30 percent drop for those with scores above 780.

"If the only people who can get a loan have near-perfect credit and are putting down 25 percent, you're leaving out of the market an entire population of creditworthy folks, which constrains demand and slows the recovery," said Jim Parrott, former senior housing adviser on the White House's National Economic Council.

Critics of the initiative say easing up mortgage credit would threaten to reinflate another housing bubble, eventually leading to another crash and downturn. However, others say that lenders are currently too risk-adverse, and that expanding credit to moderate-risk borrowers would only bring in homeowners who would normally be participating in the housing market during a recovery.

Published on April 3, 2013