Lets get back to financial gravity as a rule of lending. No more no loan docs. or liar loans or no credit FICO reports.Â Resets are not the answer to the cascade of mortgage failure. Pouring Capital on the problem is not the answer, getting back to basic laws of lending will heal the wounds of this credit amputee.
As lawmakers and housing advocates push the federal government to help cut the foreclosure rate, Comptroller of the Currency John C. Dugan offers this sobering statistic:More than half of loans modified in the first quarter of 2008 still fell delinquent within six months.
Dugan based his statement on data collected in a survey of institutions that service more than 60% of all first mortgages, or 35 million loans worth $6 trillion.
Experts say one possibility is that the modifications might not have lowered monthly payments enough to be truly affordable.
There are individuals for whom any loan modification would result in a mortgage payment they canâ€™t afford, because they couldnâ€™t really afford the original mortgage in the first place.
A well respected banker noted to me recently,
â€œAfter years of requiring stultifying documentation of checking, savings, stocks, bonds, credit bureau reports, income tax returns, personal financial statements, the mortgage lenders threw out most of these requirements to speed up the process.
Credit scores became the proxy for evaluating a potential borrowerâ€™s willingness to repay, and income verification became passÃ©. Â Low docâ€™s devolved into NO docâ€™s, especially as mortgage brokers combed the streets looking for borrowers who didnâ€™t have most of the traditional stuff, anyway. Â Alas, credit scores reflect recent pastâ€“when the borrower had a job, was happily married, was law abiding. Â Credit scores are slow to pick up on unemployment, divorce, and imprisonment.
Three Câ€™s of CREDIT, character, capital, and capacity, were basically jettisoned. Â The reliance shifted de facto, by process of elimination, to collateral and conditions, the fatal assumption being that the economy would continue to grow and collateral would keep on appreciating.
Unfortunately, there is such a thing as â€œFinancial Gravityâ€, and you know the rest of the story.â€