Several things need to happen to get credit going and they will be ugly and take time. First, housing prices were inflated by too much easy credit so the housing inventory will have to be repriced by the market for a world with more rational credit policies, like lending only to people with decent credit. There is a lot of lending going on now but much of it is those with good credit refinancing at lower rates. This is a benefit to them but not necessarily a high priority for the system. But lenders do need to make loans for new sales and with very specific lending criteria. The criteria should provide a reasonable assurance of repayment. And there needs to be a way to assure potential buyers of the loans that they are high quality, some sort of certification. Another possibility would be providing recourse. If lenders don’t pay, at least some of the problem should fall on the maker of the mortgage. This would create an incentive not to make bad loans.
There needs to be regulation and oversight to insure this is really happening and there won’t be any backsliding. Doing the right thing only counts if there is an assurance that you will keep doing it and if you don’t, you won’t get away with it.
Then credit rating agencies will have to find a way to assure themselves and investors of all this. And it will take time. People who are smart enough to still have money to invest aren’t going to be as easy to swindle now that they are on the alert. What our government should be doing is finding a way to build this system up so that all the pieces can be relied on by potential investors.
This will not solve the problem of the existing bad loans but is also urgent. We can’t just focus on the bad loan problem. There needs to be action on both the old loans as well as a fresh start for the future for the loan process. If the corrections are not made to the loan process, there won’t be any future for credit.
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