Common Sense Makes Debut in Underwriting Talks

Comptroller of the Currency, John Dugan, was in Tokyo last week urging regulators from around the world to set minimum mortgage underwriting standards for all mortgages made in their respective countries. We don’t know which is more ironic, that this comes from a U.S. official when the U.S. shoulders much of the blame for current mortgage and credit woes, or that the speech was made in Japan, which similarly suffered in the 1990s and early 2000s. In some respects, i.e.  government stimulus, we seem to be following directly in Japan’s footsteps (or missteps?).   

Among Dugan’s pearls of wisdom were the following three items that he said the United States should mandate: 1) verification of income and assets, 2) meaningful down payments, and 3) qualifying buyers on their ability to pay in the future if their monthly payments are scheduled to increase over time.

Talk about stating the obvious. This seems like such a common sense approach that it shouldn’t have to be stated, let alone mandated, but as we have witnessed over the past few years, underwriting standards at many lending institutions were just thrown out the window.

Mr. Dugan also suggested we prohibit the lowering of monthly payments through “negative amortization” mortgages as these types of loans only serve to dig the borrower deeper into debt with each passing month. Again, common sense.

There’s an inherent problem when both borrowers and lenders turn a blind eye to the actual facts behind the borrower’s ability to repay… and that’s what happened here. So while it may be ironic that these statements came from the U.S.’s Comptroller of the Currency, at least someone has begun to speak the language of  common sense. It’s just too bad it had to be a regulator.