The Ability-To-Repay Act is a Sign Of The Apocalypse

I am angry about this new “Ability To Repay and Qualified Mortgage Standards Under the Truth In Lending” Act.   Not so much because I think it will actually do anything (although the “Law of Unintended Consequences” resulting in mortgages becoming harder to get certainly might come into play), it’s more that it makes me utterly depressed that Our Nation thinks we need such legislation on our books.

I actually wrote about this proposal almost 2 years ago, and I’d encourage readers to read my prior post first, as this one will likely sound similar in many ways.  So let’s just dissect the CFPB’s blog post trumpeting the populism of this asinine law, shall we?

Richard Cordray begins:

“Today, we’re issuing one of our most important rules to date, the Ability-to-Repay rule. It’s designed to assure the reliability of mortgages – making sure that lenders offer mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be cemented in the housing market.”

He got the “simple” and “obvious” part right.  I would disagree that it needs to be cemented or regulated, but let’s move on:

“In the run-up to the financial crisis, we had a housing market that was reckless about lending money. Lenders thought they could make money on a loan even if the consumer could not pay back that loan, either by banking on rising housing prices or by off-loading the mortgage into the secondary market. This encouraged broad indifference to the ability of many consumers to repay loans, which dramatically increased mortgage delinquencies and rates of foreclosures.”

There is no doubt that we had a housing market that was reckless about originating loans and lending money.  However, as I noted in my previous post, we need to clarify a crucial point of this entire discussion:  the lender is the person who ends up holding the loan – not the person who signs the docs.   In other words, if, as I called them in my prior post, Scumbag Mortgage Originator (SMO) is the one who signs your craptastic loan docs, and then immediately sells your loan to a Norwegian Pension Fund, the Norwegian Pension Fund is the LENDER.  They are the ones who have the risk that you won’t pay back your loans.   They are the ones who need to do the homework to see if you can pay back your loan (oh – by the way – they DIDN’T do this homework during the financial crisis, because they were relying on the representations of the ratings agencies, who also don’t appear to have done their homework)…  In other words, Chordray notes that lenders could “off-load the mortgage into the secondary market” – which of course happened extensively leading up to the financial crisis.  My point is simply that there’s still a lender – and it’s not the SMO who signed the docs.  Now for the populist nonsense:

“Earlier this year, we heard from a California man named Henry, who was in the process of foreclosure. He was desperate. During the overheated years, a lender sold him a mortgage valued at more than half a million dollars. This was far more than he could afford on his annual salary of less than $50,000. He said he’d assumed that the lender knew what it was doing when he qualified for such a large loan. He’s now worried not only about losing his home, but about losing his family’s entire future.”

Well, Henry, I’m not going to sugar coat this:  you sir are an idiot, not a victim.   I’m not going to argue about this one or write 1500 words explaining my case – it’s kinda like religion or politics: either you’ll agree with me or you won’t.  Either you’ll think Henry is a victim, or you won’t.  My opinion is that Henry is not a victim, and I will not argue it with you, just like I won’t argue the merits of your God or your political saviors.   When you take out a $ 500k mortgage, you are responsible for understanding the payment terms and evaluating your own ability to repay it.  Full stop.

“Henry is not alone. Unaffordable loans helped cause the worst financial crisis since the Great Depression. People across the country were sold unsustainable mortgages. Some may have entered with their eyes open, seeking to ride the wave of rising housing prices, but many were led astray. For many borrowers, it appears that lenders ignored the numbers to get the loan approved. This kind of reckless lending was an endemic problem.”

Indeed – the SMO initiator and the Norwegian Pension Fund (and the ratings agencies too!) mis-evaluated the ability of the borrower to repay the loans.  As I noted in my prior post, making bad investments should not be illegal – unless you want to lock up the ignorant Norwegian Pension Fund manager: do you? (Sounds kinda insane when you phrase it like that, right? But they were the end lenders who enabled this machine.)    There is of course a whole other side of the coin that the CFPB ignored: the responsibilities of the borrower… Moving on to the remedies:

  • 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.

Holy cow!  What an AMAZING solution!  Why didn’t anyone ever think of this before?  This will totally change the way all of real estate – and beyond that basic finance – is conducted!  Lending will never be the same again if lenders take this new *revolutionary* idea of determining the consumer’s ability to repay the loan!!! BRILLIANT! (/sarcasm).   Do I need to explain this part?  Or does my over the top sarcasm get my message across?

The CPFB blog post then describes, of course, a proposed exemption :

“for designated non-profit creditors and homeownership stabilization programs, as well as certain Fannie Mae, Freddie Mac, and Federal agency refinancing programs. These programs generally appear to be already subject to their own specialized underwriting criteria, and they are designed to help consumers refinance into a more affordable home loan.”

I’ll leave that one for you to laugh at, without explaining that it’s an exemption for loans made to people who can’t really afford the loan. (oops! I did it. sorry – but seriously – by DEFINITION, a non-profit creditor is the one kind of lender who makes loans that can’t be paid back, right?)

I want to touch on one more point, from the PDF Summary of the Law:


Ahhh – so suddenly the consumer has awakened and realized that he had proof all along that he couldn’t afford the loan?  That he can now suddenly do the math that shows that his residual income was insufficient to make ends meet?  Now the consumer can do that, retroactively, magically?  And it’s someone else’s fault?   Nonsense.  Let’s stop making victims out of people who took stupid risks, made uninformed decisions, and lost on their leveraged gambles during the boom of the 2000’s.

I’d like to close with a self-quote rant from my original post on the subject:

“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!


Ability To Repay Act Main Page   – has links to the summary, the whole rule, etc.

ConsumerFinance Blog Post on The Act

Kid Dynamite:  Protecting Borrowers From Lenders???


This seems like as good a time as any to AGAIN put out the call to my readers to send me your “hard to understand mortgage documents.”  Disclosure: I have yet to receive a *single* one.

postscript: Yes – I am very well aware that the housing bubble had a number of players who acted badly: the ignorant borrowers, the ignorant lenders, the originators who had no risk and thus didn’t care, the banks who securitized the products for the same reason,  the ratings agencies, the end-buyers of the products.  I want to re-emphasize that what I think is really being targeted here are those “lend-to-securitize” originators who didn’t care about the borrowers’ abilities to repay as long as they could sell the loan (after all: you don’t need to legislate against actual stupid lending: it fixes itself because the lenders lose money and go out of business when they make bad loans – unless of course we destroy that process by bailing them out, which is a different issue: TBTF I guess?).  And yet, my other point is that there is some idiot buying that crappy loan: WHY?  That is what we really need to address: WHY did the Norwegian Pension Fund make such horrible lending decisions?  If it’s because they were stupid and lazy: no solution needed.  They lose money, that’s how it works.  If it’s because the Scumbag Mortgage Originator lied about the statistics of the loans: obviously a problem: a blatant violation of the law that needs to be prosecuted and fixed (but shouldn’t need new laws!).

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