Will We Get Stress Tests from our Lenders?

The whole idea of a stress test on a financial institution seems prudent. Doubly-so when that institution is receiving taxpayer money. The stress test is supposed to tell us if a bank is prepared for disaster. We found out recently that some banks passed and some banks failed when put under the microscope. We are supposed to now feel better knowing that our taxpayer money will hopefully not end up as good money chasing bad money. Taxpayers may even get paid back I hear.

This sounds great, but leads to a new question: How come the simple principle of a stress test does not apply to mortgage lending? We know that in the past, qualifying was very easy. No money down? No Problem. No verifiable income? No problem. 110% debt-to-equity? Sounds about right.

The lenders have become more strict, but I am not sure they are issuing any true stress tests on their applicants. What if the husband loses his job? What if the real estate market dips another 15%? What if the borrower cannot make the balloon payment? Are these the questions lenders are asking? And if not, should they be?

Bad lending hurts everyone. We are all sharing the cost of all the bad loan mortgage write-offs through higher national debt and deficits. Lenders have responded with tighter standards. But, good lending may be a step beyond just looking at FICO scores and debt-to-equity ratios. It may be time for lenders to look at their prospective borrowers and give them the stress test. If they make loans that can survive the unpredictability of life, then they may have helped the whole nation out.