Meet the New Standards, Same as the Old Standards

Well, knock me over with a feather:

The government is establishing new rules for mortgages that will make it harder for some borrowers to qualify but that are designed to prevent the kind of risky lending that nearly caused the housing market to collapse during the financial crisis.

The Consumer Financial Protection Bureau on Thursday will roll out the first of several far-reaching changes to the nation’s mortgage market, limiting upfront fees and curtailing practices such as interest-only payments that can leave homeowners stuck with unsustainable loans. The agency also will set standards for how much income a consumer must have to obtain a mortgage.

To obtain a qualified mortgage, a borrower cannot have a debt burden that amounts to more than 43 percent of income. That may make it more difficult for people with lower incomes to qualify. In real estate markets such as Washington, where prices are high, prospective buyers could run up against the cap as they stretch their finances to purchase homes.

In return for complying with the standards, a bank would be immune from most lawsuits. However, I’m sure that, if another collapse happens, the government will bail out the banks who don’t play by these rules as well.

Gee. It’s almost like someone realized that simply handing out sacks of money to anyone who walks in the door isn’t such a hot idea! After years of pushing banks to lend, lend, lend, the government is finally asking them to do what they should be doing anyway.

The pressure on banks to make stupid loans in the last decade were simply enormous. You had the CRA, the implicit guarantee of Fannie Freddie and the enormous pressure from the CDS and CDO markets to produce more tradable mortgages and damn the fundamentals. You then had a bailout which took only the downside risk of bad lending practices.

So having thrown all their weight — through CRA, Fannie/Freddie and bailouts — toward encouraging banks to make riskier and riskier loans, the Feds are now stepping in and saying, “Hey, you shouldn’t make risky loans! Ha-ha! Glad we finally reigned in you capitalist idiots. Why if it weren’t for us, you’d forget to lock your vaults at night.”

Here’s a prediction: these standards will pass. And in a few years, the government will start pressuring banks to make risky loans again. They will do this because securities brokers have lobbyists too. They will do this to promote home ownership, even among those who can’t afford homes. They will do this for “fairness”. But whatever the excuse and whichever party is in power, they will do it.

Because the mantra of the Nanny State always holds: whatever is not forbidden is mandatory. And preferably both.

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