The Consumer Financial Protection Bureau (CFPB) has adopted a new rule that will protect borrowers from risky mortgages. Although it will not immediately make mortgages easier to get, it will spell out what lenders must do to ensure their borrowers can afford their mortgages. Part of the reason the housing market burst was due to borrowers agreeing to mortgages they did not understand and could not afford. As a result, millions of homeowners have been foreclosed on and housing prices have dropped more than 30 percent since 2006.
The rule will go into effect next year and prohibits qualified mortgages from:
• Containing “risky" provisions, such as terms that exceed 30 years, interest-only payments or payments where the principal amount increases (negative-amortization payments)
• Carrying fees and points in excess of 3 percent of the loan
• Issuing to borrowers who will spend more than 43 percent of their income on debt payments after the mortgage
There has already been some concern from consumer groups that the rule is too protective and does not help low-income borrowers. Some groups fear that the debt-to-income ratio of 43 percent is too high for most low-income households. The CFPB said that banks would be able to ease their standards over time, however it is necessary for now.