A decade ago, lenders rolled out a bevy of mortgage options such
as "no-doc" and interest-only loans that opened the door for
virtually anyone to buy a home. This wave of subprime lending
helped many families to realize their dream of home ownership --
just before it helped spark the worst recession in about 80
years.
Now a government agency is hoping to avoid a repeat by issuing a
new rule intended to ensure home buyers can pay back their
mortgage. The Consumer Financial Protection Bureau announced
yesterday that it is issuing an "Ability-to-Repay" rule that
eliminates many of the loan features lenders had used to offer
mortgages
to those who might not otherwise qualify.
Keeping mortgage lending honest
Once
the rule
goes into effect, which is slated for January 2014, so-called
no-doc and low-doc mortgages will mostly be a thing of the past.
Lenders will be required to verify a borrower's finances to
determine whether they can repay their debt. Among the items that
must be documented are:
- Employment status
- Income and assets
- Credit history
- Other debt obligations
- Monthly payments on the mortgage, other mortgages on the
property and mortgage-related obligations
In addition, lenders must evaluate a borrower's ability to
repay the loan
before issuing a mortgage. Qualified mortgages also cannot have
features deemed risky by the government, such as interest-only
payments or terms in excess of 30 years.
Tough love from the government
The rule will undoubtedly make it more difficult for some
consumers to obtain mortgages. However, the government appears
willing to box some people out of the housing market in exchange
for avoiding a repeat of the housing bubble.
"When consumers sit down at the closing table, they shouldn't be
set up to fail with mortgages they can't afford," said CFPB
Director Richard Cordray in a written statement. "Our
Ability-to-Repay rule protects borrowers from the kinds of risky
lending practices that resulted in so many families losing their
homes. This common-sense rule ensures responsible borrowers get
responsible loans."
Still, the Consumer Financial Protection Bureau hasn't gone as
far as to entirely eliminate high-risk loans. Along with the
Ability-to-Pay rule, the bureau has proposed exemptions for certain
creditors, such as nonprofits working with low- and moderate-income
families.
If the exemptions are approved, it raises the question of
whether the new rule will lack some of the teeth needed to ensure
subprime mortgages aren't allowed to run rampant again. For now,
the bureau is taking comments on the proposed exemptions.