The government has just issued rules that will make it tougher for consumers to get certain types of mortgages, and this may be the best possible news for consumers.
As directed by the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has issued a new Ability-to-Repay Rule. Under the provisions of this rule:
- Mortgage lenders will have to collect and verify financial information from potential borrowers. Previously, some mortgage lenders were willing to bypass some verification in exchange for charging a higher mortgage rate.
- Consumers must have sufficient assets or income to repay the loan. If you've been through a mortgage prequalification process in the past, you may have been shocked about how optimistic the lender was about what you could afford.
- Mortgage lenders will have to verify the customer's ability to make the loan payments over the long term, not just during an introductory period. Some mortgages are structured with an initial period of reduced payments, with "balloon" payments to follow. It's pretty easy to qualify for those reduced payments, but it makes sense that the lender should verify that the borrower will be able to make the more difficult payments as well.
Reading this, you may be scratching your head and thinking that mortgage lenders should have been doing these kinds of things all along, if only for their own protection. Responsible lenders were, but a system where lenders could gamble on property values rising, and sell off loans that seemed unacceptably risky, allowed some to play fast and loose without facing the consequences.
How this helps
While some will howl about government interference restricting the free market's ability to provide mortgages to consumers, don't forget that the previous system resulted in a financial crisis and an epidemic of foreclosures which still continues. Owning a home for a short time only to lose it because of not being able to keep up with the mortgage payments does not help those borrowers. Everybody else pays too -- from plummeting home prices to higher mortgage insurance rates to a chronically sluggish economy, the cost of an overly permissive mortgage system is still being paid.
In short, these new rules should help prevent individual borrowers from making a costly mistake, and protect everyone else against the fallout from those mistakes.