The Problem In 2010 Is Underwriting, by The Mortgage Professor

Borrowers today are paying for the excesses of yesterday. During the go-go years leading to the crisis, underwriting rules became incredibly lax, and now they have become excessively restrictive.

My mailbox today is stuffed with letters from borrowers who are being barred from the conventional (non-FHA) market by mortgage underwriting rules that have become increasingly detailed and rigid. In many cases the rules leave no room for discretion by the loan originator, and where there is discretion, originators are often too frightened to use it because of the heightened risk of having to buy back the mortgage or incur other penalties.

Fannie Mae and Freddie Mac are the major source of the problems, but the large wholesale lenders who acquire loans from thousands of small mortgage lenders and mortgage brokers have their own rules which in many cases are even more restrictive than those of the agencies. Before the financial crisis, compliance with underwriting rules was subject to casual spot checks. Today, every loan is carefully scrutinized, and those that don’t past muster must be repurchased by the seller. The loss on a buyback wipes out the profit on about 8 loans of the same size.

 The Affordability Requirement Is a Curse


The most important of the underwriting problems involve income documentation. The abuses that arose during the go-go years before 2007 had such a major impact on the mindsets of lawmakers, regulators and Fannie/Freddie that an affordability requirement has become the law of the land; all loans must be demonstrably affordable to the borrower. I have already written about the absurdity of this requirement, which makes ineligible many perfectly good loans to good people – such as the lady with a lot of equity and perfect credit who wants to borrow the money she needs to stay in her home for a few years before she sells it.

The affordability requirement imposes an especially heavy burden on self-employed borrowers, who face the greatest difficulty in proving that they have enough income to qualify. Prior to the crisis, a variety of alternatives to full documentation of income were available, including “stated income,” where the lender accepted the borrower’s statement subject to a reasonableness test and verification of employment.

The Self-Employed Are Back to Square One 


Stated income documentation was designed originally for self-employed borrowers, and it worked very well for years. Then, during the go-go period preceding the crisis, the option was abused. Instead of curbing the abuses we eliminated the option, which is akin to outlawing knives after an outbreak of hari kari. Rejection of loan applications by self-employed borrowers with high credit scores and ample equity are now commonplace. This letter is typical.

“We were pre-approved, found a home for less than the amount approved, paid for appraisal, inspection, earnest money, title company, then a few days before closing the lender told us they cannot honor the approval because our business income was 40% lower in 2009 than 2008…can they do this?”

In this case, I have not been able to determine whether there was a rule change — from using the average of the two years to using the lower of the two years — or whether it was the interpretation that changed, but the result is the same: rejection. Before the crisis, this home purchase would have been saved by using stated income documentation.

Note that in this particular case, the cost of rejection to the buyer was raised by the incompetence of the lender. Allowing the buyer to proceed almost all the way to a closing before checking their tax statements is inexcusable. Any home buyer whose income is business-related should be sure to get their income approved before putting down earnest money and incurring other mortgage expenses.

 The Robotization of Underwriting


Loan underwriting, the process of deciding whether a loan application should be approved or rejected, used to be a profession that demanded a high level of discretion and judgment. That is no longer the case, as illustrated by this letter.

“My wife recently applied in her name only for a mortgage to purchase a single family home which will be our residence. She earns a $70,000 salary that is more than enough to cover the mortgage and has a credit score of 800. We have no debt.


I work from home trading stocks. In the market crash 08/09 I sustained losses in my trading account of $90,000. We file our taxes jointly. Today my wife’s application was refused citing Fannie/Freddie guidelines that state that tax losses must be deducted from her income…We are stunned…”
This case is typical of many that used to involve a judgment call by the underwriter. The issue is whether the husband’s capital loss actually indicated a potential threat to the ability of his wife to service the mortgage. If the husband had $400,000 in his trading account, for example, the plausible judgment would be that such a threat was remote and the loan should be approved. But in this case, the underwriter did not explore the circumstances — the rejection was automatic based on the rule. With no alternative types of documentation available, the loan was not made.

Why didn’t the underwriter use the judgment for which he is presumably being paid? He acted like a robot instead of an underwriter because his employer had instructed him to stay within the letter of the rules. The risk from making a judgment call that turns out to be mistaken has become so high that lenders find it more prudent to avoid such calls altogether.

The Lowest Rates Are Available to Few 


In addition to curtailing unduly the number of potential borrowers who qualify for loans, the current policies of Fannie and Freddie have shrunk the number of acceptable borrowers who qualify for the best prices to a very small group. To get the lowest rate possible on a mortgage sold to Fannie Mae, the borrower must have a credit score of 740 and a ratio of loan to property value of no more than 60%. The property must be single family but not manufactured, and in an area not subject to an “adverse market delivery charge.” The mortgage cannot have an interest-only provision, and any second mortgage has to be included in the 60% limit noted above.

Fannie and Freddie are working at cross purposes to the Federal Reserve. The Fed is trying to counter economic weakness by forcing down long-term interest rates, including those on prime mortgages, to all-time lows. Fannie and Freddie have made it increasingly difficult for potential borrowers to qualify, and cut the number who qualify for the very best rates to a trickle.

Thanks to Jack Pritchard for helpful comments.

Refinancing: Whom Can You Trust?, by M.P. MCQUEEN,

From Conflicts of Interest to Simplistic Formulas, the Web Is Awash With Dubious Mortgage Information. Here’s What You Need to Know


With mortgage rates falling to record lows this summer and the housing market showing signs of a pulse, refinancing activity is perking up.  It’s too bad that so many people are relying on oversimplified advice and bad numbers to decide when to pull the trigger.

The refinancing equation has never been more complicated. While some borrowers are desperate to reduce their monthly payments, others are looking to build equity. Some are even treating their mortgage as an investment vehicle, sinking excess cash into their homes in order to secure a lower rate and cut future payments.

Yet most personal-finance resources these days don’t account for situations like these. Even essential factors like tax rates and inflation expectations are often ignored in favor of simplistic calculations.

Many popular Web resources, in fact, are financed by lenders, mortgage brokers or “lead generators” that connect borrowers with banks. At times, their advice can be downright harmful.

That’s because of the risk involved. Refinancing generally costs 3% to as much as 6% of the outstanding principal of the loan, with banks levying fees on everything from application fees and title searches to appraisal costs and legal expenses. (Mortgage “points” can add to the total, though they typically help reduce the interest rate and lower overall costs.)

Fees are often murky, too, making comparison shopping difficult. The best way to compare deals, says Melinda Opperman of Riverside, Calif.-based Springboard Nonprofit Consumer Credit Management Inc., is to consult with a housing-counseling agency approved by the U.S. Department of Housing and Urban Development.

Given such costs, you don’t want to refinance often. Yet the advice coming from the mortgage world suggests you should be doing it regularly.

One particularly dubious idea gaining prominence is the “1% rule,” which used to be the 2% rule when rates were higher. The gist: Refinance when you can knock a full percentage point off your rate.

A lead-generation site called says the following in a piece called “When to Refinance a Mortgage”: “Are the current mortgage interest rates at least 1 point less than your existing mortgage interest? If so, refinancing your home mortgage might make sense.”

Wells Fargo & Co.’s website goes further. In an advice article titled “Deciding to Refinance,” it writes: “If interest rates are 1/2% to 5/8% lower than your current interest rate, it may be a good time to consider a refinance.”

Yet people who followed the one-point rule could have refinanced five or six times in the last 15 years, paying so much in fees that the savings would likely be wiped out.’s content largely comes from mortgage brokers, lenders and other industry sources, says Andy Shane, a spokesman for parent company SuperMedia Inc. In this case, he says, the author is a freelance writer with a law degree and a background in real estate who used a mortgage calculator and determined that a one- to two-point cut in rates “made a pretty significant difference in monthly payments” compared with closing costs.

Wells Fargo spokesman Jason Menke says the bank’s website has a wide range of information available to help borrowers. “The rate difference cited is just a point where a borrower may want to consider looking into a refinance,” he says.

The 1% rule could translate into big business if it catches on. About 71% of outstanding fixed-rate mortgages guaranteed by Fannie Mae or other government-sponsored entities are at least a point above current rates, according to Walter Schmidt, senior vice president at FTN Financial Capital Markets in Chicago. is another lead-generation site that offers personal-finance advice. Its new refinance calculator is among the most basic around: It asks users for some data and their reason for wanting to refinance and then spits out a yes/no answer.

The answer, however, is usually “yes.” And sometimes it comes with a suggestion for a risky interest-only loan. It also provides a way for users to sign up for a quote.

Ethan Ewing, president of, says the calculator’s simplicity and ease are virtues. Most users say they are looking for a fixed-rate loan or a lower monthly payment, he says. “If [users] can save more than $100 a month on the payment with a new mortgage, the calculator says ‘yes.’ ”

Another flawed concept is the standard break-even test. Many mortgage sites suggest that borrowers should calculate how many months it would take to save enough on mortgage interest charges to break even on the closing costs, and then to pull the trigger when the payoff goes below three to five years.

But such analyses often ignore important factors, such as how long the borrower plans to stay in the house or the borrower’s tax rate, which determines a loan’s after-tax cost.

Consider, a lead generator, broker and lender. In an article called “When Does It Pay to Refinance a Mortgage?” it warns: “There are other things to consider when you refinance, too, including taxes and private mortgage insurance. For a break-even estimate that takes many of these factors into account, use the LendingTree refinancing calculator.”

The problem: The refinance calculator doesn’t take taxes into account. It merely calculates your break-even point based on your current payment, the hypothetical new-loan payment, and the closing costs. Right below the results is a button to “start request”—meaning it will start to hook you up with a lender.

“This is a simple calculator that gives you a straightforward break-even equation,” says Nicole Hall, a spokeswoman for LendingTree. “You should speak to a loan officer to thoroughly evaluate your options…. Generally, if you can lower your interest rate by 1%, you are saving enough to justify the refinance if you are staying in the home a certain number of years.”

Versions of the same calculator appear on the sites of mortgage brokers or lead generators such as and

There are, to be sure, plenty of websites whose advice is unbiased and sound. The Federal Reserve, for example, offers a refinance resource page on its website that includes a better break-even calculator with tax-rate considerations.

A more-sophisticated calculation of the merits of refinancing would include other factors: the borrower’s tax rate, inflation expectations, how long the borrower plans to live in the house, the opportunity cost of paying closing costs rather than investing in stocks or bonds, and so on.

One obscure calculator comes close. Instead of plugging in today’s mortgage rates and determining how long it would take to pay back the closing costs, it uses “optimization theory” to conjure up a person’s ideal refinance rate regardless of where rates are now. If you can find a rate that is equal to that rate or lower, it’s time to refinance.

The bad news: Its results tend to flash the green light much less often than other calculators.

The calculator, posted on the National Bureau of Economic Research’s website at, is based on a 2008 paper by two economists at the Federal Reserve and one from Harvard University. Using stochastic calculus, they devised a formula based on the loan size, the homeowner’s marginal tax rate, the expected inflation rate over the life of a loan, how long the borrower plans to remain in the house and other factors.

“These ideas are really old hat among economists; our contribution is deriving a simple formula that anyone can plug into their calculator or computer,” says Harvard professor David Laibson, one of the authors.

The Optimal Refinance Calculator spits out tougher numbers than many other calculators in part because it factors in the benefit of waiting beyond the break-even for the chance that rates could fall further. Refinance now and you reduce your ability to refinance later.

According to the calculator, a borrower in the 35% tax bracket who has 20 years left on a $400,000 mortgage at 5.88% isn’t advised to refinance until rates hit 3.92% (assuming low closing costs of 3%). By contrast, a three-year break-even analysis of those parameters would suggest that today’s 4.5% rate is the time to make a deal.

“Some people mistakenly think [the break-even] is a recommendation to refinance,” Prof. Laibson says. “You want to wait until things get better than the break-even point. Refinancing is irreversible and really costly.”

Another way to benefit from falling rates in the future is via an adjustable-rate mortgage, the norm in places such as the United Kingdom and Australia. People with a strong conviction that deflation will unfold over the next several years can take out an ARM now and refinance later if rates start to head upward, though the transaction costs could add up.

Be warned: The Optimal Refinance Calculator doesn’t account for refinancing into shorter-term loans, such as 15- or 20-year mortgages. It also doesn’t work for “cash in” refinance deals, which investors increasingly are viewing as investments unto themselves. The bet: With stocks in a 10-year slump and bonds looking bubbly, the best investment they can make is to cut their future mortgage payments.

A new cash-in mortgage refinance tool, launched on Aug. 25 at, calculates the “internal rate of return” on the cash a borrower puts into an underwater home loan to pay off the balance and cover closing costs. The money saved each month and the balance reduction is treated as a return on the cash invested. Compare that with your expected returns on stocks or bonds to see if a refinance makes sense.

Jon Krieger, 34 years old, and wife April, 32, of Blairsville, Ga., didn’t need to invest extra cash—they simply wanted to cut their mortgage payment. Mr. Krieger says he tried several times last year to refinance but couldn’t because bank lending standards were too tight.

It’s a good thing they didn’t refinance last year. Rates have since fallen even lower—precisely the possibility the Optimal Refinance Calculator considers.

In August the couple refinanced their $416,000, 6.75% loan they took out in May 2007 with a new loan at 4.75%. It lowered their monthly payment by more than $500. The total closing costs were about $5,500, says Mr. Krieger.

The deal easily satisfies the 1% rule and the three-year break-even. It also survives the Optimal Refinance Calculator, which put the Kriegers’ ideal rate at 5.63% or below.

“We just kept plugging away and finally this came along, and it worked out real well,” says Mr. Krieger. “I was very pleased.”

Write to M.P. McQueen at

CoreLogic Home Price Index Spells Top Five Trouble for the Greater Northwest Real Estate Market, by Portland Housing Blog

We all know by now that the Northwest region of the country was late to the housing bubble. CoreLogic’s latest report shows that NW states such as Idaho, Oregon, and Washington are showing up late to the bust, and we are now leading the way when it comes to declining prices.

“CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released its Home Price Index (HPI) that showed that home prices in the U.S. remained flat in July as transaction volumes continue to decline. This was the first time in five months that no year-over-year gains were reported. According to the CoreLogic HPI, national home prices, including distressed sales showed no change in July 2010 compared to July 2009.

June 2010 HPI showed a 2.4 percent* year-over-year gain compared to June 2009. 36 states experienced price declines in July, twice the number in May and the highest number since last November when prices nationally were still declining.”


“The top five states with the greatest depreciation, including distressed sales, were Idaho (-12.6 percent), Alabama (-9.7 percent), Utah (-5.6 percent), Oregon (-4.8 percent) and Washington (-4.3 percent).”


“Excluding distressed sales, the top five states with the greatest depreciation were: Idaho (-9.9 percent), Michigan (-6.7 percent), Arizona (-5.6 percent), Nevada (-4.8 percent) and Oregon (-3.8 percent).”


Whether your sale is distressed or you are holding out for bubble era pricing, it’s become obvious that if you are going to sell a property, you’re going to end up settling for an ever lower price the longer you wait to pull the trigger. Plan accordingly if you are trying to sell a home these days in the great Northwest. Sell now or be priced in forever!

If you’re a potential buyer? My best advice is that you keep your powder dry, pay off any existing debts, stop borrowing money, and save as much as you can. Real home prices in OR, WA, ID have nowhere to go but downward as the pool of greater fools has all but evaporated at this juncture. Prudence takes immense patience in today’s real estate game.

The days of EZ bank loans are long gone. All that matters now are savings and real wages when it comes to buying real estate. When the cost of capital funds are cheap, the capital asset appreciates in value. When the cost of capital funds become expensive, the capital asset declines in value. We are in the midst of a generational shift in that equation.

Equity’s a cold hard bitch when it turns negative…


Obama Administration Awards Additional $1 Billion to Stabilize Neighborhoods Hard-Hit by Foreclosure, RisMedia

RISMEDIA, September 13, 2010—U.S. Housing and Urban Development Secretary Shaun Donovan awarded an additional $1 billion in funding to all states along with a number of counties and local communities struggling to reverse the effects of the foreclosure crisis. The grants announced today represent a third round of funding through HUD’s Neighborhood Stabilization Program (NSP) and will provide targeted emergency assistance to state and local governments to acquire, redevelop or demolish foreclosed properties.

“These grants will support local efforts to reverse the effects these foreclosed properties have on their surrounding neighborhoods,” said Donovan. “We want to make certain that we target these funds to those places with especially high foreclosure activity so we can help turn the tide in our battle against abandonment and blight. As a direct result of the leadership provided by Senator Chris Dodd and Congressman Barney Frank, who played key roles in winning approval for these funds, we will be able to make investments that will reduce blight, bolster neighboring home values, create jobs and produce affordable housing.”

The funding announced today is provided under the Dodd-Frank Wall Street Reform and Consumer Protection Act. To date, there have been two other rounds of NSP funding: the Housing and Economic Recovery Act of 2008 (HERA) provided $3.92 billion and the American Recovery and Reinvestment Act of 2009 (Recovery Act) appropriated an additional $2 billion. Like those earlier rounds of NSP grants, these targeted funds will be used to purchase foreclosed homes at a discount and to rehabilitate or redevelop them in order to respond to rising foreclosures and falling home values. Today, 95 cents of every dollar from the first round of NSP funding is obligated—and is in use by communities, buying up and renovating homes, and creating jobs.

State and local governments can use their neighborhood stabilization grants to acquire land and property; to demolish or rehabilitate abandoned properties; and/or to offer downpayment and closing cost assistance to low- to moderate-income home buyers (household incomes do not exceed 120% of area median income). In addition, these grantees can create “land banks” to assemble, temporarily manage, and dispose of vacant land for the purpose of stabilizing neighborhoods and encouraging re-use or redevelopment of urban property. HUD will issue an NSP3 guidance notice in the next few weeks to assist grantees in designing their programs and applying for funds.

NSP 3 will take full advantage of the historic First Look partnership Secretary Donovan announced with the National Community Stabilization Trust last week. First Look gives NSP grantees an exclusive 12-14 day window to evaluate and bid on properties before others can do so. By giving every NSP grantee the first crack at buying foreclosed and abandoned properties in these targeted neighborhoods, First Look will maximize the impact of NSP dollars in the hardest-hit neighborhoods—making it more likely the properties that communities want to buy are strategically chosen and cutting in half the traditional 75-to-85 day process it takes to re-sell foreclosed properties .

NSP also seeks to prevent future foreclosures by requiring housing counseling for families receiving home buyer assistance. HUD seeks to protect future home buyers by requiring states and local grantees to ensure that new home buyers under NSP receive homeownership counseling and obtain a mortgage loan from a lender who agrees to comply with sound lending practices.

In determining the allocations announced today, HUD, as it did with NSP1, followed key indicators for the distribution formula outlined by Congress. HUD is using the latest data to implement the Congressional formula. The formula weighs several factors to match funding to need in the 20% most distressed neighborhoods as determined based on the number and percentage of home foreclosures, the number and percentage of homes financed by a subprime mortgage related loan, and the number and percentage of homes in delinquency. To estimate the level of need down to the neighborhood level, HUD uses a model that takes into account causes of foreclosures and delinquencies, which include housing price declines from peak levels, and increases in unemployment, and rate of high cost and highly leveraged loans. HUD also considers vacancy problems in neighborhoods with severe foreclosure related problems.

In addition to a third round of NSP funding, the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a $1 billion Emergency Homeowners Loan Program to be administered by HUD. This loan program will provide up to 24 months in mortgage assistance to homeowners who are at risk of foreclosure and have experienced a substantial reduction in income due to involuntary unemployment, underemployment, or a medical condition. HUD will announce additional details, including the targeted areas and other program specifics when the program is officially launched in the coming weeks.

For more information, visit

RISMedia welcomes your questions and comments. Send your e-mail

Housing Doesn’t Need a Crash. It Needs Bold Ideas, Gretchen Morgenson,

WE all know that most of us don’t tackle problems until they’ve morphed into full-blown crises. Think of all those intersections that get stop signs only after a bunch of accidents have occurred.

Better yet, think about the housing market.

Only now, after it has become all too clear that the government’s feeble efforts to “help” troubled homeowners have failed, are people considering more substantive approaches to tackling the mortgage and real estate mess. Unfortunately, it’s taken the ugly specter of a free fall or deep freeze in many real estate markets to get people talking about bolder alternatives.

One reason the Treasury’s housing programs have caused so much frustration among borrowers — and yielded so few results — is that they seemed intended to safeguard the financial viability of big banks and big lenders at homeowners’ expense.

For example, the government — in order, it believed, to protect the financial system from crumbling — has never forced banks to put a realistic valuation on some of the sketchy mortgage loans they still have on their books (like the $400 billion in second mortgages they hold).

All those loans have been accounted for at artificially lofty levels, and have thereby provided bogus padding on balance sheets of banks that own them. Banks’ refusal to write down these loans has made it harder for average borrowers to reduce their mortgage obligations, leaving them in financial distress or limbo and dinging their ability to be the reliable consumers everyone wants them to be.

Various proposals are being batted around to address the mortgage morass; one is to do nothing and let real estate markets crash. That way, the argument goes, buyers would snap up bargains and housing prices would stabilize.

Yet little about this trillion-dollar problem is so simple. While letting things crash may seem a good idea, there are serious potential complications. Here’s just one: Many lenders and some government agencies bar borrowers who sold their homes for less than the outstanding loan balance — known as a “short sale” — from receiving a new mortgage within a certain period, sometimes a few years.

For example, delinquent borrowers who conducted a short sale are ineligible for a new mortgage insured by the Federal Housing Administration for three years; Fannie Maeblocks such borrowers for at least two years. Private lenders have similar guidelines.

Such rules made sense in normal times, but their current effect is to keep many people out of the market for years. And as home prices have plunged, leaving legions of borrowers underwater on loans, short sales have exploded. CoreLogic, an analytic research firm, estimates that 400,000 short sales are taking place each year.

More can be expected: 68 percent of properties in Nevada are worth less than the outstanding mortgage, CoreLogic said, while half in Arizona and 46 percent in Florida are underwater.

“There is this perception that maybe we should let the market crash and then prices will level off and people will come out and buy,” said Pam Marron, a senior mortgage adviser at the Waterstone Mortgage Corporation near Tampa, Fla. “But where are the buyers going to come from? So many borrowers are underwater and they’re stuck; they can’t buy another home.”

There is no doubt that real estate and mortgage markets remain deeply dysfunctional in many places. Given that the mess was caused by years of poisonous lending, regulatory inaction and outright fraud — and yes, irresponsible borrowing — this is no surprise. Throw in the complexity of working out loans in mortgage pools whose ownership may be unclear, and the problem seems intractable.

The moral hazard associated with helping troubled borrowers while penalizing responsible ones who didn’t take on outsize risks adds to the difficulties.

STILL, there are real, broad economic gains to be had by helping people who are paying their mortgages to remain in their homes. Figuring out how to reduce their payments can reward responsible borrowers while slowing the vicious spiral of foreclosures, falling home prices and more foreclosures. And it just might help restore people’s confidence in the economy and get them buying again.

With that in mind, let’s recall an idea described in this space on Nov. 16, 2008. As conceived by two Wall Street veterans, Thomas H. Patrick, a co-founder of New Vernon Capital, and Macauley Taylor, principal at Verum Capital, the plan calls for refinancing all the nonprime, performing loans held in privately issued mortgage pools (except for Fannie’s and Freddie’s) at a lower rate.

The mass refinancing could have helped borrowers, while retiring mortgage securities at par and thus helping pension funds, banks and other investors in those pools recover paper losses created when prices plummeted. Fannie Mae and Freddie Mac could have financed the deal with debt.

In the fall of 2008, when Mr. Patrick and Mr. Taylor tried to get traction with their proposal, roughly $1.5 trillion in mortgages sat in these pools. Of that, $1.1 trillion was still performing.

Instead of refinancing those mortgages, however, the Washington powers-that-be hurled $750 billion of taxpayer money into the Troubled Asset Relief Program, which bailed out banks instead. Though one goal was to get banks lending again, it hasn’t happened.

Now, almost two years later, $1.065 trillion of nonprime loans is sloshing around in private mortgage pools, according to CoreLogic’s securities database. While CoreLogic doesn’t report the dollar amount of loans that are performing, it said that as of last June, two-thirds of the 1.6 million loans in those pools were 60 days or more delinquent.

That means one-third of the borrowers in these pools are paying their mortgages. But it is likely that many of these people owe more on their loans than their homes are worth and would benefit greatly from an interest-rate cut.

If Fannie and Freddie bought these loans out of the pools at par and reduced their interest rates, additional foreclosures might be avoided. The only downside to the government would be if some loans it purchased went bad.

The benefits of the plan could easily outweigh the risks. Institutions holding these loans would be fully repaid, a lot of borrowers would be helped and additional foreclosures that are so damaging to neighborhoods might be averted.

“Every program that the government has announced was focused on bad credits, but they were trying to fix a hole that is too big,” Mr. Patrick said. “The idea is to try to preserve the decent risks and not let them go bad.”

At the very least, this is a sophisticated and realistic idea that’s still worth considering.