Despite Having No Chance of Passing, Bob Corker’s Homeowner Responsibility Amendment is a No-Brainer

When people ask me who was primarily responsible for the credit crisis, I give the typical “well, it was various groups acting together” answer but there is no doubt in my mind that the core of the problem was the emergence of poor home lending in this country. While I believe that both the bankers and the borrowers need to share in the blame for enabling millions of bad loans from being originated, it should be pretty clear to everyone (across the political spectrum) that if the United States had reasonable mortgage underwriting standards in place, the credit crisis would have been prevented. If I could rewind the clock to the early 2000′s and legislate underwriting standards that mandated income verification, the inclusion of a down payment, and forbade interest-only loans and mortgages where the borrower could pick from several payment amounts each month, I have no doubt the country would have looked a lot different over the past few years.

So imagine my surprise to learn that Bob Corker and four other senators have proposed an amendment to the current financial regulation debate (number 3955), which despite having obvious, reasonable, and necessary underwriting standards, has absolutely no chance of passing. The Homeowner Responsibility Amendment would, within five years, impose federal mortgage underwriting standards including a 5% down payment requirement, verification of income and employment history, private mortgage insurance for loans above 80% of the home’s value, and consideration of ability-to-repay metrics such as a borrower’s debt-to-income ratio.

Even more concerning than the fact that this amendment will be defeated handily is that one would have thought just by reading it that Republicans would be the side that had come out against it. Can’t you envision them claiming that this is over-regulation by the federal government and that it gets in the way of our capitalist, free market system? Instead, this amendment is being introduced by five Republican senators and is likely to get more Republican votes than Democrat votes. It may turn out that a majority of Republicans oppose the amendment for the reason stated above, but regardless I think it is a shame that after all our country has been through in recent years, our politicians cannot even agree that reasonable underwriting standards are needed in the mortgage industry.

If you cannot afford to buy a house, you should not be allowed to. You are not entitled to a home simply because you want one. And if you cannot put down a modest 5% down payment, verify your income, and demonstrate an ability to pay back a traditional 30-year fixed mortgage, then you should not be buying a home. And if the government wants to mandate that to avoid a future filled with billions in taxpayer bailouts and deep recessions, I don’t see why it shouldn’t, or why the American public should not be demanding such action.

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3 Thoughts on “Despite Having No Chance of Passing, Bob Corker’s Homeowner Responsibility Amendment is a No-Brainer

  1. Bret on May 12, 2010 at 7:38 PM said:

    Chad,

    I love your blog and love mirroring your investments on Kaching, but I have to disagree with you here.

    “If you cannot afford to buy a house, you should not be allowed to”

    It impresses me how one statement can evoke so many negative responses in me simultaneously. However, I’ll repeat just one of them:

    Why should anyone BUT the lender be deciding who can afford the house?

    If money is plentiful and the lender is willing to accept less than 5%, or something less than completely verifiable income (there are plenty of Software Contractors that make a killing but can’t verify income), then why should you stop them?

    Not to mention that you’d be punishing people who were given a once-in-a-lifetime chance during this latest run up. For all the people defaulting on their mortgages there are still quite a few who wouldn’t have met your standards but are sitting comfortably in a home. You wouldn’t have given them the option to buy it.

    There are far more sensible measures to be taken here. First, try eliminating Fannie Mae and Freddie Mac. Then, maybe, can we talk about eliminating the home interest deduction?

  2. Chad Brand on May 12, 2010 at 8:38 PM said:

    @Bret:

    First off, thanks for reading the blog and using kaChing.

    If the federal government was not backing 80-90% of U.S. mortgages (through the GSEs), I might agree that the lender should have sole discretion on mortgage terms, because they would be holding the loan until maturity. As long as the taxpayer is guaranteeing these loans, though, I think we have every right to implement general lending standards.

    Unfortunately, simply getting rid of Freddie and Fannie isn’t really feasible. And even if it was, it would result in exactly what I am supporting here (less money for mortgage lending and tougher lending standards by default).

    However, I completely agree about getting rid of the mortgage interest deduction. Simply favoring home owners over renters does nothing but support the notion that “renting is throwing away money” and when that happens it is easier to help form a housing bubble. Unfortunately, that single deduction appears to be a huge reason why income tax simplification (single page tax return) would be difficult to get done. While Americans would love to close the deficit they are quick to raise hell if you take away any of the benefits they already enjoy.

  3. Chad hit the bull’s eye by pointing that the lender is in fact us, the people, and not actually private money.

    It’s nicely manipulated and I bet you most of the people have no clue where the money that lenders come from, but it’s really as simple as that – those are taxpayer money.

    I was born and lived in Eastern Europe until about 10 years ago. There were many reasons for the whole eastern block to lose the war with the west, of course, but one of them was that ultimately it has come to a political enviornment where few (the communist party) controlled the resources produced by many.

    And I must tell you, what I see here is not different, only differently played out.

    Promises were made, laws were passed, loans were created, a few large entities made tons and tons of money and guess who is going to pay the bill at the end?

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