It took awhile, but more than five years after a wave of failing subprime loans wrecked the American economy, regulators have instituted new rules that prevent lenders from offering prospective buyers the worst types of mortgages.
The rules, imposed by the Consumer Financial Protection Bureau on Thursday, force lenders to do something they actively and intentionally avoided during the build up to the mortgage bubble: determine if the person they were loaning money to buy a house had the ability to repay that loan. So no more of the "no doc" or "liar's loans" that failed in epic numbers.
The rule also defines something called a "qualified mortgage." Essentially, if a lender follows a set of consumer-friendly rules when making loans, it can get legal protection from homeowner lawsuits. For example, the interest-only loans that blew up when the market started to tank are also not allowed. For the full run-down, the American Banker (subscription required) has a good analysis.
The early reaction from housing advocates is mostly positive. "The new rules generally strike a balanced, reasonable approach to mortgage lending and implement important consumer protections," the Center for Responsible Lending said.
Still, its not clear whether mortgages that include certain incentives paid to brokers would count as "qualified." One common practice, for example, was the offer of a "yield spread premium" bonus to brokers for bringing in higher interest rate loans. A few years ago I wrote about how one broker in Queens, New York got a $2,460 bonus for selling a refinance loan with an interest rate of nearly 12 percent.
UPDATE The Washington Post wonders whether the rules will restrict new lending.
“Credit is going to be restricted, at least a little,” said Cristian deRitis, a senior director at Moody’s Analytics. “The debt-to-income cap, for instance, is going to affect some folks at the lower end of the income scale.”
Seems possible, but as we've reported, lending is already extremely tight, especially for low-income borrowers. Banks have begged for clear guidelines for years, now they get them.