Consumers, Lenders, and New Year’s Resolutions
Mr. ToughMoneyLove has been informally surveying New Year’s Resolutions posted by various internet users, particularly in the personal finance world. Even the federal government has published a list of the most popular New Year’s Resolutions. Second on the list is “Manage Debt.” That’s outstanding.
I am concerned that the lenders have a big headstart. Clearly, mortgage lenders and credit card companies have blazed a trail back to lending basics. Credit underwriting is actually being used again, with verification of income, careful review of debt-to-income ratios, and increased credit score requirements. This is a good thing. In one sense it’s unfortunate that the lenders had to intervene in this way because it reflects the reality that consumers would not police their own borrowing behavior. But someone had to do something to break the consumer debt addiction and it’s better that the market do it rather than the government.
The reaction of many consumers and government policy makers to the tightening of consumer credit standards has me concerned. Instead of congratulating banks and other lenders on taking positive steps to insure that people who borrow money have the ability to repay it, folks are demanding a return to the free-flowing credit days of old. I am in favor of opening up the business credit pipelines. But what is so horrible about asking consumers to follow the lead of the banks and move back to old school lending and borrowing practices?
Here is one piece of recent evidence that supports my argument that the lenders may do better than the borrowers with their resolutions. According to this post in the Wall Street Journal, Congress is upset that the government’s “Hope for Homeowners” foreclosure avoidance program has done virtually nothing. It seems that the reason for this failure is that for a borrower to participate, he or she must certify that the borrower did not make any false or misleading statements on a prior loan application. Oh-Oh. Busted. It also seems that there were more “liar’s loans” than we thought. So many borrowers (perhaps aided by greedy mortgage brokers) were fabricating income information on their initial loan applications that now they cannot participate in the loan workout program. If they did, they would be compounding the lie.
This is the consumer credit mindset that we need to eliminate. Lying to borrow money can no longer be accepted by anyone. I’m no fan of lenders in general but if tightening of credit standards by lenders forces consumers to “manage their debt” better, then more power to them. Indirectly, that helps everyone’s personal finance resolutions.
Image credit: CJLUC