Join        Login             Stock Quote

The CFPB's Ability-To-Pay Rule Is Even More Useless Than You Thought

 January 17, 2013 02:56 PM

(By Matt Stichnoth) Despite the housing crackup and everything that followed from it, the federal government just can't bring itself to stop pushing homeownership for subprime borrowers. Caroline Baum notes that the CFPB's new "ability-to-pay" rule, which is supposed to prevent the next housing bust by ensuring that lenders only write loans that borrowers can "afford," takes an oddly myopic view of credit underwriting.

New regulations will never prevent the next crisis. They can't. The [ability-to-pay] rule writers, as instructed by Congress, didn't even try this time, according to Edward Pinto, a resident scholar at the American Enterprise Institute in Washington: They ignored two of the three C's of underwriting.

[Related -In A World Of Artificial Liquidity – Cash Is King]

A borrower's credit reputation (credit score and history), capacity (things like debt ratios and cash reserves) and collateral (total equity or down payment) must all be acceptable for the mortgage to qualify for sale to Freddie Mac, according to the government-sponsored enterprise. 

Yet the new rule, as prescribed by Dodd-Frank, "focuses on debt ratios at the expense of everything else," Pinto said. "There's no standard for credit quality. Lenders have to verify the source of the down payment, but a down payment isn't required." That's because Congress viewed it as discriminating against the poor, Pinto said. [Emph. added]

[Related -Did The IMF Provide Support To Syriza?]

So as far as the government is concerned, it's perfectly ok for lenders to make low-downpayment loans to people with sketchy credit histories, as long as the borrowers meet some semi-arbitrary income threshold. What could go wrong? You may believe (as I do) that the CFPB's new rule is an unneeded intrusion into a private transaction in the first place, and that the unfettered market will adequately deal with whatever problems occur. But it's still kind of maddening, just the same, that implicit in the CFPB's new rule are the same homeownership-for-all government policies that did so much to cause the trouble in the first place. Some people really never do learn.

iOnTheMarket Premium


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageIn A World Of Artificial Liquidity – Cash Is King

It's more crucial now than ever for people to consider extracting a portion of cash from their bank read on...

article imageDid The IMF Provide Support To Syriza?

The IMF published yesterday a preliminary analysis on the debt sustainability of the Greek read on...

article image3 Defensive Stocks Offering Safety, Yield In A Turbulent Market

The world can be a scary place to invest these days. Greece can't pay its debts, Russia is a mess, China's read on...

article imageFour Stocks in the Dow Making Fresh 52 Week Lows

“What gets weak tends to get weaker; what gets strong tends to get read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.