New mortgage rules are step forward for housing
Commentary:
(MoneyWatch) Thursday's move by the Consumer Financial Protection Bureau to announce new rules aimed at making mortgages safer makes me think back a decade to where we were in 2003.
The real estate market was hot, hot, hot, with properties snatched up in minutes after being listed. Homebuyers earning $50,000 per year were being approved for $500,000 mortgages, "no-doc" and interest-only loans with "teaser" interest rates being the norm. Those were the "good old days," much longed for by both real estate agents and mortgage lenders.
Flash forward to today, when the CFPB set forth new regulations for homebuyers and investors seeking mortgages, including:
- Potential borrowers must supply financial information, and lenders must verify it
- To qualify for a loan, a consumer must have sufficient assets or income to repay the loan
- Lenders will have to determine a borrower's ability to repay both the loan principal and the interest over the long term, not just during an introductory period when the rate may be lower
The new rules also establish a new category of loans held by community banks and credit unions, called "qualified mortgages," that are supposed to protect consumers from predatory actions by lenders. Apparently, the government wants to protect consumers from themselves.
I've been writing about real estate long enough to remember when a 20 percent cash down payment was the only way you could qualify for a mortgage. You had to be able to swing the payments, with some cash to spare. Lenders, which put many of those loans in their own investment portfolios, also wanted to know you had enough cash to make a few extra payments, just in case you lost your job, had to replace your hot water heater or buy a new car battery.
But mortgage lenders were always more flexible with real estate investors and provided creative financing solutions, albeit with higher interest rates and more points and fees. Why wouldn't that work for home buyers? With a push from our legislators in Washington, lenders jumped at the chance to remake the residential mortgage market.
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I remember back in the very early 1990s, when Jim Johnson, then CEO of Fannie Mae, announced that no one should ever be turned down for a mortgage and that A- loans were just as good as Grade A loans.
It was a slippery slope that produced massive profits over the years for lenders, and millions of new and mostly happy homeowners.
And make no mistake: The vast majority of homeowners paid their mortgages on time. Until the Great Recession hit, roughly 98 percent of Americans paid their mortgages on time, every month. It was a point of pride.
But over time, the fudge factor disappeared. The cash cushion lenders once demanded melted away into an over-reliance on credit scores, where a high score -- and a pulse -- were all it took to walk away with a loan that was 10 times the borrower's household income.
And when the bad times hit -- and by golly, the past five years have been nothing short of horrific financially for all but the top 5 percent of income earners -- most Americans had nothing to fall back on other than unemployment benefits. Because who saves for two years of unemployment?
The new mortgage rules are pretty much what we've already been living with for the past couple of years. You have to earn enough income to be able to make your payments; you can't leverage your borrowing up to 10 times your income; and if you want to refinance, the lender has to prove it's in your best interest.
The real estate industry won't like these new rules. They're designed to keep the real estate market real and grounded, whereas real estate brokers and mortgage lenders like to sell hope and an eternally sunny vision of the future. Who actually wants to eat their veggies when the bag of potato chips is sitting on the shelf?
It's quite possible that our real estate market will recover more slowly because everyone actually has to earn enough income to afford their mortgage. The good news is that homes in the U.S. are nearly as affordable as they've ever been. If we have to actually be able to afford our homes, it's a good thing they cost less than they used to.
That's the new reality. And until our economy has completely recovered, our unemployment rate has fallen and we're earning more each year than the prior, we'll all have to live with it.
Let the howling begin.
