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Remember the reason for mortgage rules

By Peter St. Onge
Peter St. Onge
Peter St. Onge is The Observer's associate editor.

On hot summer Saturdays eight years ago, I was on a team of Observer reporters who walked the streets of Charlotte neighborhoods, looking for people who wanted to talk about their mortgages. The neighborhoods were on the edge of the city. They boasted rows of new starter homes with young trees and green patches of front yard. Already, they were beginning to be dotted with foreclosures.

This was before the recession, before the big banks wobbled, before most people even had a hint of the trouble that would come. But in these neighborhoods people were fearful, and while some didn’t want to talk about their circumstances, I was surprised at how many did. They sat me down in their living rooms and kitchens, and they laid out their mortgage documents, their bank statements, the intimacies of their financial lives. They were desperate.

Back then, in 2005, we were among the first newspapers in the country to report on the depth of foreclosures. We knew why it was happening - for years, homebuyers were putting their signatures on loans that shouldn’t have happened. Many were victims of predatory builders and real estate companies taking advantage of a reckless lending environment. Regulators were clueless, intentionally so or not.

We also knew the root of it all. Both the Clinton and Bush administrations had made increased homeownership a policy goal. To that end, the feds loosened requirements for FHA loans. Homeowners no longer needed a down payment, and they could borrow more against their income. And because the FHA guaranteed repayment of those loans, lenders could take more chances, too.

The inevitable result: More bad loans, which banks packaged into toxic investments, and we all know the rest.

Have we forgotten that, just eight years later?

Last month, federal regulators announced that a key part of the Dodd-Frank financial reform law was getting a severe watering down. Two years ago, regulators had proposed a 20 percent down payment to qualify for home loans. The reasoning was simple: Home loan defaulters tended to be people who didn’t have a lot of equity to begin with. But now, a revised rule requires no down payment at all.

This retreat came after relentless pressure from housing industry lobbyists, as well as supporters of low-income housing, who argued that a 20 percent threshold would eliminate homebuyers and snuff out the housing recovery. They also argued that other new rules did enough by placing tough debt-to-income thresholds on loans and discouraging dangerous loan gimmicks that fooled consumers into thinking they could afford a home.

On that, the lobbyists are right. The new rules will stop the worst of the loans. But the loss of a down payment requirement – even 5 to 10 percent – opens a door for lenders to work the edges and homebuyers to take risks they shouldn’t.

And we know now what’s really being risked, big and small. I drove through one of those Charlotte neighborhoods again recently in the university area. There were still too many For Sale signs, still too many vacant homes and untended yards. It was a reminder not only of the living rooms and kitchens I sat in, but how foreclosures bleed, ruining the values of homes and neighborhoods nearby.

That’s the tug of regulation, no? We should not want to prevent markets and industries from flourishing, especially in an economy so fragile. But too often, businesses choose the bottom line over the greater good, and too often, consumers need protection against ... themselves. Eight years later, we shouldn’t forget the damage that can be done.

Email: pstonge@charlotteobserver.com
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