A Novel Idea: Confirm the Borrower’s Ability to Repay

The new mortgage rules coming out of the Consumer Financial Protection Bureau are pretty amusing for anyone who was early in calling the housing bubble for what it was years ago. As it turned out, lending practices at the time weren’t what some Fed officials called “wealth creation technology”, but, rather, slip-shod procedures that no one really cared about so long as home prices kept on rising.

Since no one else apparently wanted to do it, the new government agency saw fit to define clear rules regarding borrowers’ ability to repay as detailed in this report, rules you’d think would always have been an important element of any mortgage market at any point in history. Here’s a summary:

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created broad-based changes to how creditors make loans including new ability-to-repay standards, which we are charged with implementing. Among the features of our new Ability-to-Repay rule:

• Potential borrowers have to supply financial information, and lenders must verify it;
• To qualify for a particular loan, a consumer has to have sufficient assets or income to pay back the loan; and
• Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term − not just during an introductory period when the rate may be lower.

I’ll never forget, years ago, when doing a few interviews about the housing bubble, I noted that the most egregious thing going on in the mortgage industry was that hundreds of thousands (if not millions) of loans were being approved where the borrower had zero chance of being able to service the loan over the long term. If the price of the house didn’t go up and he could either sell it at a profit or take cash out, the borrower was doomed, but those practices just drove prices higher until everything fell apart starting in 2007.