Scott Van VoorhisHow can this be? A good half-decade after the real estate bubble burst, some of the nation’s largest banks say they need more time to comply with some new, but pretty common sense mortgage rules.

Really? After all, we are not talking about derivatives here, but rather verifying that borrowers actually have the means to buy a house. Oh, and also making sure they don’t take on too much debt.

The brainchild of Sen. Elizabeth Warren, the U.S. Consumer Protection Financial Bureau unveiled new mortgage rules last week to provide a few rules of the road for the battered home-lending industry.

Yet even before the new regs were unveiled last Thursday in Baltimore, various banking groups, including a cluster of regional banks that includes Providence-based Citizens, were clamoring for an extension.

In a letter sent to the agency and reported by Bloomberg, the banks warned they might even have to stop writing mortgages if they are pushed too fast.

 

New Rules Hardly Radical

Sure, there are all sorts of technical and compliance issues financial institutions have to deal with when new regulations come down from Washington.

But this was hardly a surprise.

The outlines of the new rules were surely known for months – that’s why the financial sector spends millions upon millions each year on Washington lobbyists.

Yet, by appearing to balk at some arguably pretty mild, no-brainer lending rules, it was also pretty inept public relations, fueling more cynicism about the banking sector on part of an already pretty skeptical public.

That the consumer protection agency is even alive and kicking right now and trying to bring some order to the post-Armageddon mortgage market is something of a miracle.

The fledging watchdog has been demonized by Republicans, in no small part due to its connection to Warren, who came up with the idea

Yet strip away all the partisan political nonsense, and what the consumer bureau is proposing is far from radical.

For starters, lenders have to be able to show that they truly vetted a borrower’s income and assets – no more fudging allowed.

And banks will have to ensure that borrowers stay within reasonable debt limits if they want their loan to receive a coveted “qualified mortgage” stamp of approval.

While it would be too much to say the new rules are a joke, they are anything but stringent.

Banks can approve a mortgage as long as total debt does not exceed 43 percent of pre-tax income. Take into account taxes, and a borrower could wind up with a mortgage and other debt that takes well more than half their paycheck, and still receive the consumer bureau’s good housing keeping stamp of approval.

Interest-only mortgages, and loans whose principal can grow over time, leaving a homeowner even more in debt – both bad news – would not be eligible for the consumer bureau’s stamp of approval.

The new rules don’t even include plans to force borrowers to cough up a big chunk of cash up front – there has been widespread fear among mortgage and real estate brokers that 20 percent down would again become the norm.

And in return, lenders who comply with these rules and underwrite “qualified mortgages” win legal protections against disgruntled homeowners.

 

Big Opportunity Blown

It’s kind of ironic given all the rash lending that went on during the bubble years that lenders would demand up to a year to comply with simple rules like closely examining a borrower’s debt-to-income ratio.

Now to be fair, at least some of the banks that say they need more time will likely point out they were fairly tame in their lending during the bubble years.

In fact, the worst lending abuses were by and far committed by the bevy of mostly now defunct mortgage companies, which vomited out toxic subprime mortgages across small towns and big cities alike.

But the public is not making such fine distinctions right now – all they see are bankers dragging their feet at complying with what sounds like pretty mild, common sense lending rules.

Sadly, here was a golden opportunity to get out front and make a virtue out of necessity. And, once again, the bankers blew it.

Scott Van Voorhis can be reached at svanvoorhis@hotmail.com.

 

New Lending Regs Create Clamor For Extension

by Scott Van Voorhis time to read: 3 min
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