Monday, August 17, 2009

The world has gone mad, WSJ edition.

So apparently Vermont has some strict lending rules and the WSJ was presenting the Pros and Cons of such rules. I have to admit some of the cons left me a bit flabbergasted.

From the
WSJ (emphasis added):
Vermont's strict mortgage-lending laws largely prevented the state's residents from signing the types of dubious home loans written in other markets across the country. Its 1990s legislation made mortgage lenders warn customers when their rates were relatively high, and put the brokers who arranged loans on the hook if their customers defaulted. Now, by at least one measure, the state has the lowest foreclosure rate in the U.S.
It came at a cost. The rules also kept some Vermonters like Ms. Todd from buying homes, keeping this rural corner of New England on the sidelines of the housing boom and the economic bonanza that came with it. Vermont's 10-year growth trails the national average.

Turns out when you opt out of the biggest credit bubble in human history your growth will lag a bit. But you won't bust as hard either. I just love that an unsustainable credit bubble that has created an economic situation not seen since the great depression was considered an "economic bonanza". I bet at one time the author wrote about how all the other villages in Guyana missed out on the delicious Kool-Aid served over at Jonestown.

"It's not that complicated," said U.S. Rep. Peter Welch, a Vermont Democrat. "There just has to be a connection between the amount you borrow and your ability to pay."

Critics say such rules put a brake on growth.
developers and others "can't march into the state and start doing business."

If you require that someone prove they can pay back a loan it puts a brake on growth. You get less malinvestment and you have more good loans and a solid base to build an economy. I get the feeling the author either is trying to make a story out of nothing or really doesn't understand that there was a credit bubble and it isn't done deflating.
Insurance adjustor Ginger Shields says she tried for years to qualify for a home loan. After a decade and a half of renting, she and her husband sought a loan in 2003 from a TD Banknorth office in her north-central Vermont town of Barre. The bank's loan officer said their credit score of 550 -- below the level considered healthy -- wouldn't allow them to qualify.

A local mortgage broker said the same thing, recalls Ms. Shields, now 59 years old. The couple had no savings, and were saddled with credit-card and other debts. They had liabilities she says they didn't know about, including debt on a totaled car they thought the insurance company had paid off.

TD Banknorth wouldn't discuss the specifics of Ms. Shields's application. But the rejection of someone who can't show their ability to repay a mortgage "is more common than not in the state of Vermont," said Stephen Kaminski, a senior vice president of mortgage products.

The bolded comment suggests that in many states people who can't show their ability to repay a mortgage still commonly gets loans. Which is a scary thought.

Ms. Todd, the onetime self-employed landscaper, was also turned down repeatedly starting in 2004. With a 750 credit rating, she wanted financing for a home in the $160,000 range.

Banks wanted Ms. Todd to prove her income could support a mortgage -- in contrast with brokers in many other states who wrote loans without requiring proof of income. It didn't help, Ms. Todd said, that she wanted to put no money down, also commonplace in other markets.
The extra hoops were a "great thing" in the end, she figures.
"Five years ago if I'd gotten the loan," she said, "I would have been in over my head now."

I wonder how many people wish they were forced into delayed gratification instead of becoming part of the ownership society before they were ready. There are no shortcuts. The banks should be telling borrowers no, it protects the borrower and the bank. The banks should have conservative appraisals, it protects the borrowers and the banks. The downside risk of a society that does not rely on financial innovation for significant economic growth just don't seem like downside risks to me. Easy money turns out to create rather hard landings later on. Nothing is free.

1 comment:

Anonymous said...

Critics say such rules put a brake on growth.

It's THEIR growth they are talking about...not anyone else's.

When no one buys drugs from a drug lord, he'll be up in arms about how "business growth" is being stunted.

The whole financial system is full of crooks. It's based on's based on cheating, screwing over, etc. It can't work otherwise.