Avoiding a mortgage crisis
Philadelphia Inquirer: At long last, the Consumer Financial Protection Bureau has unveiled sensible new home mortgage rules aimed at protecting consumers, banks, and investors while avoiding another financial meltdown.
The rules require banks to determine whether a borrower can actually pay back a loan. That may seem like a no-brainer, but it is quite an accomplishment, considering that in the years leading up to the 2008 recession, billions of dollars in mortgages were given to people who had no hope of paying off their loans. As a result, more than four million mortgages went into foreclosure.
Under the new rules, which go into effect in 2014, the lender has to take into account a borrower’s income, job, and overall debt, including credit-card debt, student loans, car loans, and other obligations. If debt exceeds 43 percent of a consumer’s income, the consumer won’t qualify for a mortgage.
That may be hard news for a family wishing to buy a house, but it saves them from the future heartache of losing that home to foreclosure and damaging their personal credit.
Limits on lenders
The new rules also restrict a lender’s ability to steer unwitting borrowers into adjustable-rate mortgages, loans with balloon payments and high fees, loans that raise the principal, and other exotic financial products.
The rules give banks more protections, too. They won’t be held liable if a consumer fails to pay a mortgage because he lost his job. But they stay on the hook for riskier loans, like those with adjustable rates. Fundamentally, if banks would restrict lending to those who substantially demonstrate the ability to repay that debt, they wouldn’t see the record default rates that zapped their bottom lines.
Investors, too, are protected by the new rules. When lenders package loans for resale, they must keep 5 percent of the loans being put into an investment instrument. That would mean the lenders have some skin in the game, too, so it would be in their best interest to sell solid loans.
Regulators also should write tougher standards for Fannie Mae and Freddie Mac, the federally sponsored agencies that guarantee or own more than 80 percent of the nation’s mortgages.
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