Arnold Kling  

Underwriting Errors Outlawed

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A Tax Increase I Can Support... Just a Reminder...

The WSJ reports


The thrust of the mortgage section would require lenders to make sure that borrowers can repay any home loans they are sold. It puts limits on the ability of lenders to offer loans without documentation from borrowers, and has rules regarding the way loans can be refinanced.

Making a loan that subsequently defaults is known as a Type I error. Turning down a loan that will subsequently be repaid is a Type II error. In the past, the Congressional harpies have gone nuts over type II errors, accusing lenders of denying loans to minority borrowers and ruining the American dream. Now, they are going nuts about Type I errors. I would love to pass a law saying that mortgage underwriters will no longer make any mistakes, but that is like passing a law saying that heavy objects dropped from ten-story windows will no longer head toward earth.


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COMMENTS (3 to date)
Steve Sailer writes:

Any law that makes it harder to lend to people who are less likely to repay their mortgage will have disparate impact on the races.

Matthew Gunn writes:

How does this interact with the FHA, which, as I understand, is back to going gangbusters trying to minimize Type II error?

Boonton writes:

You can make all the crappy loans you want, just label them as crappy. NPR's Money program brought a 'toxic asset' for $1,000 and has been tracking its performance ever since. Right now they have received about $450 in payments from the asset (when people pay their mortgages on time or pay them early by selling or refinance they get a piece, foreclosures and write offs lower their piece). The CDO as a whole is just about bankrupt. There was nothing inherently wrong with this asset if it had been marked as a junk investment. If it sold for $300-$400 it would actually have generated a nice return for any Wall Street quant who had brought it for his firm.

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