Tony Ciochetti, Ph.D. 
Professor of Finance and Real Estate at University of Texas at San Antonio

The strict lending standards that have governed the mortgage and real estate markets for the last several years have certainly been effective at putting only the most credit-worthy borrowers into homes. That said, there is a growing demand among borrowers--who fall outside these strict parameters--who want to cash in on today's historically low mortgage rates and attractive home prices.

Given the new law and the narrow definition of what constitutes a "Qualified Mortgage," we interviewed Dr. Tony Ciochetti from the University of Texas at San Antonio to explain how the government should deal with "less-qualified" candidates and if this group of potential borrowers is really a threat to housing's continued recovery.

Q: With losses still fresh in our minds, and with some homeowners still struggling, should we continue to advocate and support homeownership for marginal income/credit borrowers?

A: It has been an objective of our government to help support homeownership in the U.S. since the Great Depression; however, the recent housing collapse was driven in part by incentives that were in place during the "go-go" times of the early to mid-late 2000s. Loose borrowers, loose underwriting, loose credit, loose ratings, unique mortgage products and a general attitude that real estate only goes up all helped exacerbate the problem.

The lack of true accountability along many parts of the process allowed some to kick the can down the road until it became a national and international issue. There is no doubt that, while many housing markets in the U.S. are recovering, the pain will likely linger in others. Still, supporting homeownership in the U.S. is an important component of our economy and a fundamental aspect of achieving "The American Dream."

At issue here is the definition of "marginal income/credit borrowers." With proper underwriting, income verification, ratio analysis and valuation of the underlying security for the loan, we should be able to support well-monitored programs that help support homeownership.

Q: Currently, what's the biggest threat to housing's continued recovery?

A: Basic supply and demand issues will drive the housing markets going forward. Currently, demand has been recovering in the housing sector, which has helped prices recover from the lows of 2008 to 2010. To a degree, this recovery has been fueled by record low interest rates that make housing more affordable. In addition, new construction is at near all-time lows, so there is a limited supply of new product to compete with existing housing. As prices recover and the existing inventory of housing declines, builders will begin to create new inventory in markets where demand is strong.

In other markets where demand remains soft, prices are likely to recover at a slower rate. Most expect that mortgage rates will begin to rise at some point, although the increase may or may not impact buyer demand. All of these factors feed into what we refer to as "the housing recovery." Lest we forget, the state of the economy impacts interest rates, job growth, retail sales, and the multitude of other factors that help consumers decide if they want to buy or sell a home.

This article Will Marginal Mortgage Borrowers Threaten the Housing Recovery? originally appeared on

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