Are New Lending Rules Hurting the Economy?

Everybody knows that the economic crisis came about, in large part, because loans were given that could not be paid back. Since then, both the government and individual lending agencies have developed stricter lending policies in order to prevent the same thing from happening again.

In theory, this is a good thing.  Stricter lending laws seem to lead directly to the giving out of fewer bad loans, which in turn will not be sold as investments and will not tank the economy when they’re not paid back.
The downside of stricter lending, though, is that having fewer bad loans means having fewer loans in general, and that means less consumer spending and fewer new jobs in important sectors such as the construction industry.

While many of these stricter lending policies have to do with loans given out to individuals and families hoping to purchase a new home, some of them also target construction companies.  These companies are often being asked to put down double the down payment they had before the financial crisis, plus a deposit equal to a year’s worth of interest on the loan.  With this kind of up-front investment, it’s no wonder construction still only proceeds slowly.

Since the construction industry is one of the prime places where new jobs will pop up, holding it back means holding back the entire economy. Some economists say that this is worth it to deter another crisis, but others aren’t so sure.

And the stricter lending policies are hitting individuals, too. Take the new FHA lending rules, for instance.  Not only are they making loans harder to get, but they’re hurting condo prices across the country. It’s now harder than ever for a condo complex to qualify for FHA buyers, and that means the pool of potential purchasers for these condos is lower. With demand down, condo owners have to sell for less or hold out and hope things get better.

With every positive move, it seems, there are also negative repercussions.

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