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.