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From an editorial published in the Philadelphia Inquirer on Tuesda y:
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 4 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.
The new rules also restrict a lender’s ability to steer borrowers into adjustable-rate mortgages, loans with balloon payments and high fees, loans that raise the principal, and other exotic 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.
Too bad the CFPB didn’t require lenders to keep an even higher percentage of the loans they sell. That would do more to avoid the havoc that occurred when toxic loans were resold in the marketplace and drained billions from investors.
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.
