The OCC and Changes Ahead in the Mortgage Industry

Don’t think for a minute that John Dugan the head of the Office of the Comptroller of the Currency (OCC) is just another Washington bureaucrat with no real power. Based on this speech it appears that there are changes under foot in the mortgage industry.

. . . . he is increasingly troubled by the growing use of unverified “stated income” in subprime lending, and said he believes the federal agencies should address the practice in pending guidance.

“Sound underwriting – and, for that matter, simple common sense – suggests that a mortgage lender would almost always want to verify the income of a riskier subprime borrower to make sure that he or she had the means to make the required monthly payments,”

A comment worth repeating:

“As a result, the rapidly rising housing market of 2003-2005 was the perfect Petri dish to incubate the widespread practice of stated income loans,” he said. “At a very fundamental level, it was a bet that the increasing value of a borrower’s collateral would offset any inadequacy of the borrower’s income.”

A house is not something that you buy on margin and hope the price goes up. This is always a recipe for disaster. This reminds me of the P. T. Barnum quote "a fool and his money are soon parted".