One of the most mind-boggling aspects of the mortgage meltdown half a dozen years ago, and of the economic collapse it spawned, is evidence that it was largely a self-inflicted wound.
Before Lehman Bros. collapsed in 2008 and the credit markets froze, before the stock market plunged and joblessness soared, there was this: Billions of dollars in mortgage loans were made to people who couldn't reasonably expect to repay them. And though some involved outright fraud by borrowers or lenders, others were well within the loose rules of our overly deregulated financial markets.
Next month, that is finally going to change, says Richard Cordray, director of the Consumer Financial Protection Bureau.
In a speech last week to the Consumer Federation of America, Cordray heralded the agency's new mortgage-market rules as recognition of things that, in hindsight, should have been obvious.
"Reason and sound judgment were absent" when lenders could hand out money without concern for whether borrowers could pay it back, Cordray said. "The supposedly rational market had become wildly irrational."
Now, he told the group, common sense is poised for a comeback. And as Cordray told me afterward, there's basis to believe that these kinds of reforms alone could have averted much of a crisis still causing massive pain.
Established under 2010's Dodd-Frank Act, the CFPB was designed to address marketplace problems from the bottom up - both because protecting consumers from dangerous or abusive goods and services is an essential role of government and because bad loans contribute to broader risks such as inflated housing prices. As CFPB progenitor Elizabeth Warren has put it, the financial crisis began "one bad mortgage at a time."
How will the new mortgage rules change that? By setting back-to-basics standards for both lenders and servicers.
Starting Jan. 10, new home loans designed to meet the agency's strictest standards will be designated "qualified mortgages."
Such a loan will have to come with minimal points and fees - a total of 3 percent is the ceiling - and meet basic underwriting guidelines, Cordray says. The mortgages will also have to lack the kind of risky features popular during the bubble years, "such as paying interest only and not principal, or even paying less than the full amount of interest," he says, "so that each month you owe more than you did before."
Cordray stressed that lenders remained free to write other kinds of mortgages. "The whole point is that they cannot lend to you without determining that you are able to repay," he says.
All borrowers stand to benefit from the new rules for servicers - especially crucial because consumers can carefully choose a quality lender and still have no say in who services their loan.
Cordray says transparency is a key theme in all the rules - along with "no surprises and no runarounds."
Servicers will be required to answer questions, investigate complaints, and fix errors. Monthly statements will put "all the important information in one place, showing you the interest rate, loan balance, escrow account balance, and where the payments are going," he says. And borrowers should no longer face fees "that seem to come out of nowhere."
"It may seem silly that we need rules to tell servicers to answer the phone; not to lose people's paperwork; to tell borrowers how much they owe. It might also seem silly that we need a rule telling lenders they must pay attention to whether borrowers will be able to repay the money lent to them," Cordray says. But, he says, such basic failures were routine in the precrisis years.
Other work remains to fix the mortgage market, particularly to guard it from distorted incentives that enabled lenders to dodge all risk from their own bad loans. But a recent Goldman Sachs analysis estimated that the new CFPB rules could have averted nearly half the defaults linked to the crisis - an estimate Cordray mentioned after the speech.
"If these rules had been in place 10 years ago, we wouldn't have had this crisis to the same degree," Cordray told me. "Better late than never."