Protecting Borrowers from Lenders (???)

Stop and read the title of this post again.   I can only hope you find it as moronic as I do, and yet, this is the bizarro world we now live in.  I’ve been mocking the fact that so much of our news lately looks like it could be coming from the humor satire site The Onion, but when the Federal Reserve is involved, well, I don’t know what more to do that just shake my head and get depressed.  via Reuters, emphasis mine:

“WASHINGTON, April 19 (Reuters) – Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.

The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.

The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.”

I mean…  WTF? Lenders need to make sure that borrowers can repay the loan?  Can’t we file that one under “NO SHIT SHERLOCK?”*** (see footnote)   Look – this isn’t about “buyer beware” or “Caveat Emptor.”  This is about basic human intelligence and responsibility.  If we need a law that says that lenders have to make sure that borrowers can repay their loans, then we are, in a word: FUCKED.    You’re going to sue me because I gave you a loan that I never should have given you?  Holy crap – I am on friggin’ BAJUNGI TILT just thinking about this. It’s patently ludicrous.

Seriously – it’s like suing a hooker for giving you herpes, only not really – because hookers who give their clients herpes can stay in business, but lenders who make loans that cannot be paid back cannot stay in business – unless of course we make more idiotic decisions that enable them to stay in business, get bailed out, and keep making more bad loans that can’t be paid back!  Wear a condom – do your due diligence – protect yourself.  Stop this nonsensical victimization of EVERYONE.    TAKE RESPONSIBILITY!

The Federal Reserve’s full press release is here. And their more detailed explanation is here.


*** “Kid Dynamite,” you say “the problem in the crisis was that there were so many originators using the lend-to-securitize model who didn’t need to make sure that the borrowers could repay the loan because they could just sell off the risk.”

Yes, of course – I am glad you brought that up, because in these cases (and there were hundreds of billions, if not trillions of dollars of these cases) the lender isn’t “Countrywide” or “OptionOne Mortgage,” or “Wells Fargo,”  the lender is the pension fund who bought these securitized products without doing the proper research on them.   Bad investment decisions shouldn’t be against the law. Should we sue your pension fund because they enabled horrific loans to be made?  Of course not, but the buyer of the securitized product is the ultimate lender, here.

Thus, the problem isn’t the loans themselves, it’s any potential fraud that occurred in the chain between origination and securitization.

Example: if  ScumbagMortgageOriginator (SMO for short) originates a bunch of dogshit mortgages, securitizes them, and sells them to the Norway Pension Fund, the potential problem lies if SMO claimed that the loans were 650 FICO and 80% Loan-to-value when in reality they were 550 FICO and 100% Loan-to-value.   If SMO makes false claims about the characteristics of the loans, that’s fraud – we don’t need more laws to fix that – we just need to enforce existing laws.

However, if the problem was that Norway Pension Fund had a bad pricing model, or made bad assumptions about the potential risk of the loans, or ignored the possibility that home prices could decline, or ignored the possibility that borrowers could lose their jobs and thus their ability to pay – as long as the loans were accurately described by SMO, that’s not fraud – that’s stupidity, and we don’t need legislation to fix it.  If Norway Pension Fund thought that 550 FICO & 100% LTV was a good investment at 150bps over treasuries just because Moody’s said it was AAA, that’s not fraud, that’s stupidity.


postscript 2:  I have mentioned in the past that I think we should require borrowers to get a “mortgage license” that demonstrates a basic level of understanding and intelligence before they can borrow massive sums of money and buy a home.  If the Federal Reserve really wants to go this route (and it seems that they do!) and believes that we need to protect borrowers from lenders, or lenders from their own idiocy, then we should also protect borrowers from themselves.  Let’s remove all excuses:  you have a mortgage license?  Good – then you understand, so you can’t possibly claim that you didn’t understand.  Zip it.  Put down your lawsuit and take responsibility for your own actions.

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