(This is Part 2 of a two-part series. Read Part 1, "Tighter lending rules could backfire.") A widespread view held by bank regulators, community groups and some legislators is that all home mortgages should be "affordable," and government should do what is necessary to bring this about. Last week, I looked at one concrete proposal designed to ensure the affordability of adjustable-rate mortgages (ARMs). It was to require lenders to qualify ARM borrowers not at the initial interest rate but at the "fully indexed rate," which more closely approximates the rate at the first and second rate adjustments. I pointed out that this rule would have little or no force because lenders could evade it with impunity if they wished to. Further, it is not at all clear that we would want such a rule to be...
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