Underwrite, Sayeth The Fed

This paragraph from the WSJ’s Bernanke story today sums up concisely just how bad mortgage lending was during the bubble:

For homeowners, Mr. Bernanke said the Fed would release much-anticipated rules next week that would prohibit certain mortgage practices the central bank deems “unfair” or “deceptive.” He suggested the final rules would be changed some from a proposal made in December. Among other things, the proposal would ban lenders from originating mortgages “in a pattern or practice” that doesn’t take into account a borrower’s ability to make payments in most cases.

Yes, when lending money to someone, it is good to consider whether they can pay you back. The Fed is going to force banks to “underwrite,” which became a quaint concept during the froth.

This new Fed proposal is nothing if not an admission of a massive market failure in the absence of commonsense regulation. Can we not agree at this point?

The Los Angeles Times also notes these crazy new rules coming down the pike and adds that the “can you pay” standard will include whether borrowers will be able to afford their notes when their adjustable-rate mortgages reset higher.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.