The federal government plans to make it easier for lower-income Americans to borrow money to buy homes – which was the foundation of the disastrous sub-prime crisis.
Then, banks were encouraged by the politicians to relax their lending standards. So they did so… spectacularly. They often failed to verify income, glossed over credit history, issued mortgages with a hidden risk of skyrocketing interest rates down the line. The dodgy loans were packaged, given ridiculous soundness ratings by agencies, and sold on to naïve institutional investors such as pension funds.
After the meltdown, regulators initially defined qualified residential mortgages (QRM) – those deemed secure enough to exempt banks from extra capital requirements to protect themselves against enhanced risk – as those where borrowers provide a down payment of at least 20 per cent and have an income of at least 36 per cent of loan servicing payments.
Under political pressure, the regulators now want to slash those terms. Their most radical proposal is that the down-payment requirements should be scrapped, and the debt-to-income ratio raised to 43 per cent.
Will official promoters of easy credit never learn? Unfortunately, they’re far too prevalent in governments around the world.
CopyRight – OnTarget 2013 by Martin Spring
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