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New rules limit risky mortgages

The aim is to safeguard borrowers from mortgages they can't afford. As a result, fewer people may qualify for loans.

By MSN Money Partner Jan 11, 2013 3:01PM

This post comes from Marilyn Lewis of MSN Money.


A set of new government rules issued by the Consumer Financial Protection Bureau requires lenders to make sure that borrowers can repay their mortgages.


The goal is "mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be cemented in the housing market," said CFPB director Richard Cordray in a letter on the agency's website.


The new rules, required by the 2010 Dodd-Frank Act, should curtail widespread use of the risky mortgage types and features that contributed to the housing collapse. 

What will change

The rules won't take effect for another year, and will be phased in. 


Image: Home for sale (© Corbis)

They establish a category of "qualified mortgages" offering the most protections for consumers. These also protect lenders from the threat of lawsuits by borrowers and investors. Qualified mortgages impose stiff requirements on borrowers and lenders.


The rules also make it hard for banks to offer interest-only mortgages. Negative-amortization loans, where the balance owed grows larger with each payment rather than smaller, will be hard to get.


Lenders will have to document borrowers' ability to repay. That means far fewer "no-doc loans," in which borrowers don't need to show what they earn or the source of the income.


When selling an adjustable-rate mortgage, lenders will have to show that a borrower can afford not only the initial payments based on the low introductory rate, but also the higher payments charged when the rate is adjusted upward.


In practice, many of these features and loan types have been unavailable since the housing boom ended. In fact, lending is currently so tight that Realtors and shut-out borrowers complain that banks are too restrictive.


Protection from consumer lawsuits

To win lenders' cooperation, the rules offer both a stick and a carrot. The "stick" is the big list of requirements. The "carrot" is the promise of protection from lawsuits by borrowers in foreclosure. If lenders adhere to the rules, they'll be largely shielded from lawsuits by consumers.


"Banks can make such loans, but the new rules would not protect them from potential borrower lawsuits if they do so," says The New York Times


The Wall Street Journal writes:

"While the CFPB rules wouldn't necessarily have prevented banks from making exotic loans during the housing bubble, lenders would have faced far greater legal liability had the rules been in place because borrowers would have been able to sue for damages in a foreclosure. Mortgage-finance giants Fannie Mae and Freddie Mac also would have faced greater liability for buying such loans."

Upshot for consumers

For consumers, the rules promise more safety. But there are loopholes. Consumer advocate Alys Cohen, a staff attorney for the National Consumer Law Center, said in an email interview:

"There are gaps and loopholes . . . predictable ones and ones we don't yet know about. When those emerge, many homeowners will have no recourse (to sue) and banks will have full legal insulation under the rule, even for making some knowingly unaffordable loans.

Dean Baker, a co-director of the Center for Economic and Policy Research in Washington, D.C., said he's "pretty comfortable" with the new rules.


Reached by email, Baker said he was less troubled by loopholes. "At the end of the day, no regulations are worth anything if the regulators aren't doing their jobs."


The effect on cost and availability of mortgages isn't entirely clear. The Washington Post  predicts it will become harder for consumers to get qualified mortgages, but those who do will enjoy lower rates and fewer fees.


Borrowers who can't get a qualified mortgage have other avenues. Low- and moderate-income borrowers, for example, can try smaller lenders, such as community banks and credit unions. These lenders typically hold on to their mortgages rather than selling them to investors, as larger lenders do. This gives them more flexibility. But these loans entail more risk for lenders, so they're likely to be more expensive.


The Wall Street Journal predicts that the new rules will limit choice and variety of mortgages. "The upshot is that banks are likely to narrow their loan offerings and rely more on the 30-year, fixed-rate mortgage, a product unique to the U.S. and one that has required a government guarantee."


More from MSN Money:

Jan 14, 2013 9:57AM

"The goal is "mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be cemented in the housing market," said CFPB director Richard Cordray "


Seriously, have we become a nation of such mindless zombies that we need a government rule to tell us how much we can afford to pay every month on a mortgage?


Government rules can't fix stupid.

Jan 13, 2013 2:19PM
You'll notice that the "new rules" don't include stopping the Federal Reserve from buying them with no diligence, quality assurance, warranties and representations. In short, the "rules" are worthless and don't solve anything. When does our government actually do something to fix a problem?
Jan 11, 2013 5:37PM
Someone just now thought up this rule ?
Jan 13, 2013 2:24PM

"Someone just now thought up this rule?"


Nope. It's a small part of normal lending done before banks got as corrupt as they are now and Wall Street got involved with lending. TWO rules you won't see... you book it- you service it, and... you can only lend out 110% of your deposits... ever. If we REALLY want to fix the problem, we need to Close the Banks, End the Federal Reserve and get RID of Wall Street.


Feel free to write the President and Congress but don't expect results.

Jan 13, 2013 6:39PM
  You mean illegals can no longer get 110% financing for a home.  OMG due diligence what a concept.
Jan 12, 2013 1:49PM
Screw wall street lenders ! Its time to put some limits and down payments on banks who write a mortgage! The last time the IDIOTS on wall street had people sitting at star bucks writing mortgages with no money down is OVER... I need the value of my home back ! Like most Americans who have stayed and did everything right and never was late on a payment need the value back into our homes ! Wall street sucked 75% of the value of our homes into the drain ! Never again its time to put back sound lending practices into place ! Its time to draft a law that says.... A FORECLOSED HOME FROM A BANK CANNOT BE SOLD FOR LESS THAN 10% OF THE FORECLOSED MORTGAGE AND THE PREVIOUS PURCHASED PRICE. tHAT WOULD HAVE PRESERVED OUR HOME VALUES DURING THE MELTDOWN... ...I sick to see homes in my area selling at an auction for 50,000 in my 250,000 area... Stop all walkaways.. The banks that gave wal-mart workers loans for 200,000 should have failed on wall street with no bailout! But the Feds Ben and the boys are buying toxic mortgages at the tune of 40 BILLION a month...Talk about socialism ?? Its alive and well on wall street ... No free markets there....Its time to put the Glass Stiegel act back into place ! That's what started the meltdown ...Mixing deposits with risky investment banking... Thanks to Bill Clinton ! They got rid of this act so Travelers' insurance could be bought by Citi bank...That started the huge risk by wall street idiots... What a mistake...
Jan 12, 2013 12:17AM
I just can't stand it, we need the government to figure out if I can afford a house and oh! safeguard me, excuse me but what the f*#* is so hard to understand about that? And, it will take them a year to figure out how to do it. Wonderful, I wonder where our commpany would be if it took me a year to get something done I could do in a day. When the leftist world turned the scumbags like barney fa***# frank and that scuzzball dodd loose to spew their terror on the general public knowing what they were doing to make banks give loans to people who everyone knew could never afford them, and then have the audacity to turn on the bankers and point their crooked little fingers and vomit their accusations, they knew exactly what they were doing. Those two belong in jail, along with the rest of that mutt bunch right on back to Jimmy the peanut brain Carter. I thought we were finally rid of that barney frank, but no, not yet, now we have to watch that towel chewing bark come crawling back out of the woodwork, senator frank, vomit. Please say it ain't so, if I could be king for a day, (like king obummer) and it would take the full day, when I got through, America would look like a real America again, and the mutts that have dragged our country to it's lowest depths ever in the course of our history would feel a wrath they would not soon rub off. It ain't the guns or gun shows Stupid, it's the fingers that pick them up, it ain't the lack of oil, it's the America reconciler that won't let us get it, gas before obummer-1.80, after obummer-4.00, it ain't the lack of health care, it's the lack of the free market place that won't allow it to be cost efficient, it wasn't 13 million used cars that needed to be shredded, it was pay back to conservative car dealers, and payoff for the kings buddies, it ain't that American democracy is over, it's because the mutt media allowed the leftist agenda to spew, and totally disregarded their creed to be independent, honest professionls and are 100% behind it, god I prey that when that **** we have in the white house finally drags enough of the alligator brains down and they finally figure it out, it ain't the rich, it's only a tax and spend president, and he wants everyone's money,  just maybe they will figure out the he ain't Santa. Rolls Royce is having one of their best years, starting price-280k, there are over 600 pleasure yachts over 150' long being built around the world today, 10mil. to 200 mil.+, 10 years ago, only a hand full existed, does obummer really think he can tax the wealthy out of existance, no, but he knows if he can control the poor and turn them on honest hard working Americans, he might be able to destroy our country, and that's exactly what that socialist wants, and I challenge anyone to disprove it.
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