Gov't Targets Irresponsible Loans With Tough Love
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 governmentThe 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."
Check Out Our Best Services for Investors
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts