New federal rule: Make sure borrower can pay loan
The Consumer Financial Protection Bureau has issued new guidelines for home mortgages. The rules require income verification, but don't specify a minimum down payment.
After months of discussion, the Consumer Financial Protection Bureau has come out with rules it says will help protect consumers from toxic mortgages.
The new “Ability to Repay” rule is designed to make lenders determine that borrowers can actually pay back their mortgages. Lenders whose loans follow the guidelines for what is called a "Qualified Mortgage" are protected against certain lawsuits. While lenders can issue mortgages outside the rules, they won’t have the same legal protections.
Post continues below
The rules don’t include any guidelines about the size of a down payment. There had been much speculation during the two years that the rule was under discussion that a qualified mortgage would include a 20% down payment. That didn’t happen, though the CFPB is planning to issue more rules on mortgages later.
The new rules essentially end the no-doc and low-doc “liar loans,” in which customers did not have to document their income. The rules also limit borrowers’ debt-to-income ratio to 43% in most cases. Interest-only and negative amortization loans don’t qualify, and the qualified mortgages will limit fees.
Whether the rules will do anything to make loans more available is a big question. In general, the standards are similar to those lenders are using on their own now.
The housing industry and consumer advocates generally praised the new rules.
"The Consumer Financial Protection Bureau’s new rules generally strike a balanced, reasonable approach to mortgage lending and implement important consumer protections," the Center for Responsible Lending wrote in a news release. "The standard CFPB establishes for a safe, well-underwritten mortgage is appropriately broad enough to include the vast majority of creditworthy homeowners, and it is clear enough for lenders and borrowers alike to understand. And the rules preserve legal protection for borrowers with the riskiest loans."
Barry Rutenberg, chairman of the National Association of Home Builders, said in a statement that his organization "is encouraged that regulators heeded concerns from the housing industry to craft a broad standard that includes many of today's sound mortgage products, including fixed-rate and adjustable-rate mortgages, under the QM standard."
The new rules were required by the 2010 Dodd‐Frank Wall Street Reform and Consumer Protection Act, which called for restricting mortgages to people who had the ability to pay them back – something that wasn’t a concern during the heady days of the real-estate boom.
"In the run-up to the financial crisis, we had a housing market that was reckless about lending money," CFPB Director Richard Cordray wrote on the agency’s blog. "Lenders thought they could make money on a loan even if the consumer could not pay back that loan, either by banking on rising housing prices or by offloading the mortgage into the secondary market. This encouraged broad indifference to the ability of many consumers to repay loans, which dramatically increased mortgage delinquencies and rates of foreclosures."
The banks are already working with the new rule. If you are retiree and need a bridge loan you may very well not get past the first question, what is your income? Since you are living off your savings, or 401k, technically you do not have an income and you are denied for "lack of Income". So if you plan on moving when you retire, you will need to plan accordingly. No income, no loan. If you think your net worth will help, forgetaboutit. I have a net work of several million but NO INCOME, no loan. Thank you Wells Fargo!!
The law of unintended consequences!!!!1
Wow! This is amazing to me. Does anyone else find it amusing that the government wants to make sure that someone who borrows money can repay?.... Yes let's raise the debt ceiling... again! That must mean we have a plan to balance the budget (because no one should borrow money if they cannot repay). Oh, we do not have a plan? Come on people. The problem is not the banks. Let's talk about lack of personal accountability in our society. It is very simple. LIVE WITHIN YOUR MEANS! READ a contract before you sign it (yes even a mortgage contract)! If you do not understand it, DO NOT SIGN IT!!!! If you DO sign it. You are responsible! You don't get to just stop paying. If you stop paying, you lose your house. Pretty simple. You don't like that big bad bank. No problem, take your money and your business to another bank. But my house isn't worth that much anymore? I picked the house. I signed the contract. I do not have the credit or money to refinance. It must be their fault. Really?????
you need to follow the cause of things before you say it is crap do not be stupid because that is what the white house wants you to be so the stupid can be controlled with out a fight get smart
At least they`re doing something about the "bad loan" ,etc problem. They should have had that in place a long time ago. Just going by somebodys credit score and approving them for a loan has always been kind of unfair to people that didnt have good credit but actually were a better risk in letting them buy a house just on income,or promise to pay,without worrying if their credit score was alright.
What bank processed that loan? And why did the rules allow it? Could it be because it was over 25% down and the borrower had great credi t??? Combine that with the fact that the loan was going to become part of a mortgage-backed security which the bank was going to make a killing on, and you've got a recipe for disaster.
This has got to set some kind of record for closing the barn door after the horse has run away. In this case, the horse escaped, galloped across the whole continent, and died of old age before the farmer finally got around to thinking about maybe possibly closing the door.
Most of those 'liar loans; were made to people who could afford them. They were people with exceptional credit and 20% down and they were purchasing homes which were at or below appraised value.
What happened next is that the property value plummeted. Many people did 'strageic defaults] and who could blame them? Many other people lost their jobs or at least significant income and couldn't pay.
The Fleecing of America is almost complete.
So these new rules are a good thing. The only way to hurt a greedy banker is to hit him in his pocket lol. Personally I would like to see these same CEO's taken to court for the lies they made their employees tell but I guess that's not going to happen anytime soon.
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.