Federal officials unveiled new mortgage rules January 10th meant to reduce risky lending. The new rules are also meant to make it easier for borrowers to know exactly what mortgage they are getting into.
The rules are meant to avoid the kind of mortgage mess that created the financial crisis and ultimately led to the Great Recession.
The housing bubble was driven by lenders lax (or complete lack of) underwriting standards. Lenders often didn’t check basic, common sense, documentation. Banks did not require minimum credit scores or even take time to determine whether borrowers had income enough to keep up with their new mortgage payments.
I worked in lending for many years (a long time ago) and always thought these basic requirements were part of getting a home loan. Apparantly we went so far off the rails during the housing bubble that federal officials must present these as “new mortgage rules”. Okay.
Lenders must now consider these factors:
- Income and assets must be sufficient to repay the loan;
- Borrowers must document their jobs;
- Credit scores must meet minimum standards;
- Monthly payments must be affordable;
- Borrowers must be able to afford other debts associated with the property such as home equity loans;
- Borrowers must be able to afford all home-related expenses such as property taxes; and
- Lenders must consider a borrower’s other obligations like student loans, car loans and credit cards.
Another requirement addresses the other lending problem abused in the bubble years. When judging a borrower’s ability to repay, lenders can’t use payments based on interest-only loans (also called negative-amortization), a loan type that can cause mortgage balances grow significantly over time.
They also can’t use artificially low interest rates (teaser rates); loans that start out with a ridiculously low interest rate and then adjust higher after a set term.
Additionally, loan terms cannot exceed 30 years.
These rules don’t prohibit those unconventional types of loans. But lenders, in deciding whether to make this type of loan, must underwrite a borrower’s ability to repay as if the loan were a conventional loan.
All pure common sense.
These “new rules” begin January 21, but because these are such dramatic changes to the way some lenders are doing business the lenders will have 12 months to fully implement them.