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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 -Market Needed a Yellen Bump and Didn't Get It.]

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 -Will The Sluggish US Housing Market Perk Up This Year?]

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.

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