Thursday, April 21, 2011

Fixing the Banks

This was a story from Reuters:

Fed unveils proposal on mortgage standards

WASHINGTON (Reuters) - Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.

The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.

The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrower’s ability to repay the loan.

Unbelievable! Barney and Chris have suddenly decided that you have to have the ability to repay a mortgage loan. The part about everyone owning a home didn't work out so well. Needing the ability to payback a loan sounds pretty obvious but that is not the point of the law. This is in the Dodd/Frank Bank Act or whatever According to their plan, if you don’t repay the loan, you can sue the bank that lent you the money because they lent you money that you don’t repay.

I don't think this will reduce loan defaults and with such a dopey rule, why should anyone ever repay any loan? Just default and sue the bank who lent you the money. You can then pay off the loan with the money you get from the law suit. But then you can repay the loan so the bank will sue because you can pay the loan. The bank wins this time because you can pay the loan. Now you have no money because you lost and can’t pay the loan so you can sue the bank for lending you the money. But you win and can pay the loan so…..

Might never end. But the lawyers make out well. Probably doesn't make any difference since with this kind of law out there, why would anyone lend any money?

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