New rules make mortgages safer

January 23rd, 2013

The Consumer Financial Protection Bureau (CFPB) just issued new rules to prevent abusive mortgage practices. While a mortgage calculator can give consumers ready access to details about the monthly and cumulative costs of different types of mortgage loans, the new rules create a broader context for those figures to help ensure that borrowers will be able to repay their loans.

Highlights of the new rules

The following are some highlights of the new rules, along with some comments on why they are important to consumers:

  1. Ability to repay must be thoroughly examined. There are two sides to the mortgage payment equation. A loan calculator can give you a clear picture of one side -- how much the loan will cost on a monthly basis. The other side of the equation is the availability of resources to meet those monthly payments. This means factoring in not just your income, but also whatever other payment obligations you might already have. A more rigorous examination of the borrower's full financial situation will help people avoid over-extending themselves.
  2. Consumers must document their financial situation. One of the worst abuses of the housing boom was the proliferation of what came to be known as liar loans -- loans where the borrower could avoid proving their financial resources in exchange for paying a higher mortgage rate. Consumers with the legitimate means to repay their loans should have no problem providing the necessary documentation.
  3. All payments must be considered -- not just introductory ones. Not all mortgages demand the same monthly payment over the life of the loan. Some are structured to minimize initial payments; others have the possibility of changing if mortgage rates change. Borrowers have the most certainty if they choose mortgages with fixed payments over the life of the loan; but if they choose a loan where the payments can vary, they must examine their ability to repay under all payment scenarios.

Making it more difficult to get a mortgage may not seem like a consumer-friendly development, but these new CFPB guidelines should not prevent people from getting loans they can readily repay. The loans the new rules might block are those would probably turn out badly for the consumer in the long run in any event, but a mortgage calculator can help consumers see how a mortgage fits into their financial situation.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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