Making mortgages sustainable

Posted: January 15, 2014

IT SEEMS so basic - require mortgage lenders to qualify borrowers based on their ability to repay the loan. Yet this wasn't the case for many mortgages in the run-up to the housing crisis, contributing to the mess we're still in now.

Nevertheless, you can hear criticism of the new mortgage rules that became effective Friday. Under the federal government's ability-to-repay rule, lenders must make a "reasonable, good-faith determination" that an applicant can afford the mortgage.

Critics say the stronger mortgage requirements could make it harder for people to quality.

Yes, that's the point. We had to move away from how things were. For the last several years, I've worked with many homeowners struggling under burdensome mortgages. I'd often look at their loan papers and shake my head. How could they manage such large monthly payments after some ridiculously low teaser rate expired? What were they thinking?

But I also want to smack the people who approved many of these mortgages. It may have been legal in most cases, but that didn't make it right. The lenders should have known better. They were the professionals.

So many people got loans without lenders verifying their incomes. Some loans were interest-only. Borrowers got loans with super-low adjustable rates that, when reset, consumed an unsustainable amount of their incomes. Some people even were approved for loans with negative amortization in which their payments didn't even cover the interest.

Such loans shouldn't be made, says Richard Cordray, director of the Consumer Financial Protection Bureau.

I sat down with Cordray just before the ability-to-repay rule went into effect. As part of the changes, so-called qualified mortgages must have relatively low fees. The loans can't have certain features such as allowing a borrower to pay only interest. Generally, borrowers can't have total monthly debt, including mortgage payments, that exceeds 43 percent of their gross income.

There was one word Cordray kept coming back to in order to address the complaints from critics: sustainable.

"Homeownership is still one of the best ways to build sustainable wealth as long as you're getting a reasonable mortgage that can succeed over time," he said. "Again, all we're doing here is really going back to basics, which is the kind of lending that was done historically. . . . A back-to-basics approach to us makes a lot of sense, both on the lending side and on the servicing side, and I think it's going to be good for the market."

To make his point further, Cordray referred to a Goldman Sachs report finding that of the loans made from 2005 to 2008 that defaulted, nearly 50 percent would not have been made under the ability-to-repay standards.

"All our rule says is, if you're going to make a mortgage, you have to make a reasonable determination that the borrower has an ability to repay," Cordray said. "That's not something new or exotic. That's what responsible lenders have done for decades."

Also included in the new approach are tougher requirements for mortgage services. Companies that service loans now have to send monthly statements so borrowers can clearly see how their payments are being credited. They must quickly fix mistakes, and they must credit payments the day they get them. They have to send people early notices if they have an adjustable-rate mortgage that will be changing in order to give them time to refinance or get help if they can't afford a higher payment.

Mortgage servicers will now have to call or contact most borrowers by the time they are 36 days late on their mortgage and provide information about their options. Except in limited cases, servicers can't start a foreclosure until a borrower is more than 120 days delinquent. And mortgage servicers can no longer initiate a foreclosure while they are also working with a borrower who has submitted a complete application for help.

Yes, it will be harder to qualify for mortgages. But it doesn't mean loans can't be made outside these new rules.

During an appearance on "The Daily Show," Cordray was compared by Jon Stewart to the Prohibition agent Eliot Ness.

That's exactly what we needed, and an agency of enforcement personnel to touch the untouchable lending practices that contributed to so much pain and heartache.

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