An article published by The Washington Times about modifications to credit score prerequisites and interest rates on mortgage loans has sparked a lot of discussion. As per the article, the Federal Housing Finance Agency plans to establish loan rates and charges in a manner that implies individuals with better credit scores will be compelled to pay more to finance those with lower credit scores. However, the accuracy of this claim is yet to be confirmed, and there is a need for further investigation to determine its validity.
A market economy depends on lending to drive innovation and investment, but this process relies on a risk-based system between lenders and borrowers. This simple relationship depends on the cost of risk involved, with lower risk resulting in a lower interest rate and a bigger risk leading to a higher interest rate. However, when it comes to housing and mortgage lending, there is often resentment and grievance, as some people are not able to borrow as much as others.
It’s important to understand that a working market economy cannot rely solely on cash available today. Without lending, innovation and investment would be impossible. Risk-based lending is crucial for creating a healthy lending environment that enables businesses and individuals to access the necessary capital for growth and development. When lenders take risks, they require a higher interest rate to offset the risk they are taking, while borrowers with lower risk can enjoy lower interest rates.
The relationship between lenders and borrowers is critical for a thriving economy, and the rules of this relationship are universal, from playgrounds to prisons, bodegas to boardrooms. The more friction involved in this relationship, the slower an economy grows. While there may be resentment and grievances in the mortgage lending process, it’s essential to remember that the risk-based system is fundamental to creating a healthy lending environment that enables growth and prosperity.
Should people with high credit scores pay higher mortgage payments to subsidize folks with bad credit? For more information, Lars speaks with Roger Valdez, Director of the Center for Housing Economics and a Research Fellow at the Foundation for Research on Equal Opportunity (FREOPP).