Continuing their tradition of issuing regulations three years after they would have done any good, the financial system powers-that-be have recently proposed stricter guidance for subprime lenders. And continuing in its own tradition, the mortgage industry has responded by throwing a hissy fit.

The rule that has lenders most up in arms (so to speak) is described thusly:

An institution’s analysis of a borrower’s repayment capacity should include an evaluation of the borrower’s ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule.

What this means is that when lenders are figuring out whether to give someone a home loan, they have to determine not just whether that person can afford to pay the initially low “teaser” rate, but also whether he or she will be able to afford the higher payments once the loan resets.

Is it so revolutionary to suggest that borrowers should be expected to keep paying the mortgage even if they are unable to successfully flip their houses before the mortgages reset? Apparently so. According to the CFO of lending giant Countrywide Financial, as related by Reuters:

Sixty percent of Countrywide’s customers seeking hybrid adjustable-rate mortgages, or ARMs, such as “2-28” loans would fail to qualify under the guidance that urges lenders weigh the borrower’s ability to repay at the highest possible rate during the life of the loan…

That’s right, if the expectation is that the borrowers will actually continue to pay their mortgages for more than a couple of years, a full 60 percent of them will have to be shown the door. And, according to Countrywide’s CFO, that’s somehow a bad thing.

The same regulators released a set of mortgage guidelines a while back, but the exotic lending gravy train didn’t really jump the tracks until the capital markets started to shut off the flow of funding. Perhaps these regulations will take a back seat to market forces as well. If these proposed rules do end up being enforced, however, they could be another nail in what’s looking more and more like a coffin for EZ-Credit.


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