New Mortgage Rules: Protection From Banks, or Ourselves?

The government is set to unveil new rules pushing mortgages down a more conservative path. Is it the banks we're worried about? Or our own behavior?

  • Share
  • Read Later

The federal government’s consumer watchdog will introduce new mortgage rules today. They are designed to protect homebuyers from big bad banks. But they are also about protecting consumers from themselves, which is a slippery slope.

Post-financial crisis, it’s deemed too much to expect individuals to read and understand a mortgage document. Dozens of studies suggest we are a financially illiterate society; attempts to teach people about all manner of credit and personal financial matters have largely failed. For our own good, then, the government must mandate “plain vanilla” products that a child could understand.

So the Consumer Financial Protection Bureau is set to unveil standards for something called a “qualified mortgage.” If lenders meet certain criteria for simplicity and transparency, borrowers will have limited ability to sue for damages should things not work out. Basically, banks are being required to dumb down the process and make sure their clients can afford the loan.

(MORE: Fiscal Cliff Aftermath: New Options for 401(k) Savers)

Presumably, the new standards will take aim at things like verified income and a borrower’s debt ratio. The housing bubble was in part a product of banks’ willingness to lend without proof of income or with little concern for overall indebtedness. One likely result: To be a qualified mortgage, a borrower’s total monthly debt service could not exceed 43% of pre-tax income, reports the Wall Street Journal. And in most cases mortgage originators will be restricted from charging excessive upfront points and fees and offering loans that require balloon payments, reports the New York Times.

The upshot is that the mortgage business is being funneled down a more conservative path, which is great for folks who can’t or don’t want to do their homework. That’s a lot of people, by the way. The CFPB, acting as directed by the Dodd-Frank financial-regulator overhaul of 2010, is doing these folks a genuine service.

Yet this service has costs. It may smother innovative mortgages, like those that for a period charge interest-only or allow the principal balance to increase. Yes, such products were abused in the bubble years. But non-traditional mortgages still make sense for a homebuyer who, say, has relatively little income but will collect a windfall in a few years. One size does not fit all. Exotic mortgages have their place, small though it may be.

(MORE: Is Broadband Internet Access a Public Utility?)

Meanwhile, the new rules may tighten credit for those who need it most and require a bigger down payment, locking some out of the housing market and undermining the recovery. All this is debatable. But clearly the new rules signal an approach to consumer protection that is about oversight—not education.

Maybe that’s just what we need. Maybe, as some scholars have argued, the vast majority of the population will never get it financially speaking. Better to spend our resources on watchdogs that will bite the big bad banks when they get too creative. I can’t dismiss the value of protecting those who cannot protect themselves.

Still, an educated borrower would not need so much protection. She could self regulate any financial institution that failed to point out her interest rate will double after an initial teaser period. We wouldn’t need so much oversight, which reinforces our worst instincts to want to be taken care of. That’s the slippery slope of dependency.

Our pension system is broken, the government is deeply in debt, and the growth we need for a solid fix is unlikely anytime soon. Folks need to know how to make smart money decisions in all parts of their life—from student loans through retirement saving.

(MORE: Arms Race)

We need to start with financial education in every classroom and extend it to the workplace. We need to train teachers to teach kids about money and make financial education programs part of every 401(k) plan. In the meantime, yes, we need plenty of oversight. But that’s not the best long-term solution.

16 comments
BryanWilcutt
BryanWilcutt

I read about this on apollumi.com.   The prediction is home sales are now going to drop as they did in Canada late last year because of similar rules.

steve082810
steve082810

I'll bet the banks get a lot more than they give on this - they have lobbyists and big campaign contributions - the borrower doesn't. 

Try this instead:

If the bank makes a loan, and it defaluts, they take the loss - even if they sold the loan to someone else.  That eliminates liar loans without eliminating some of the more exotic loans.

No bail outs, and reduce deposit insurance to $10K per household, no matter how many accounts, or how many different banks.  That way, the depositors and investors will pay attention.  A banks starts doing risky stuff, everyone pulls their money out - stops them in their tracks.

The Fed stops screwing around with interest rates.  Let interest rates rise as the economy (or house prices) heat up.  Stop the housing bubble in its tracks.

It would be nice if the media returned to the good old days of being a watchdog, instead of a branch of one party or the the other.  When things start to get dicey, bring us (poltically unbiased) economists, not polititicans.

ABC123
ABC123

@steve082810 Easily the most lucid post on here.  You should run for office!

garyk176
garyk176

What we needed from Congress was to completely remove the Federal government as an active participant in the home mortgage business.  The taxpayer guarantee of defaulted mortgages creates the risk in the first place - without that, lenders be on the hook for losses and would make sure that borrowers can and will pay back the loan.  The government creates the problem, then complains about the obvious result.

IgnatiusIbsage
IgnatiusIbsage

"Maybe that’s just what we need. Maybe, as some scholars have argued, the vast majority of the population will never get it financially speaking."

yeah, i guess we're all mexicans now, eh?

gardengal4
gardengal4

The way I understand the creation of the new rules, it is TO PROTECT THE BIG BANKS!!!   Once a loan is a "qualified mortgage" the bank cannot be sued for selling it and carving it up into bond investments.   No one cares about the homeowner.   The spin is at work.


"Now, when a loan meets new lending criteria outlined by the CFPB, it
becomes a "qualified mortgage," which will give protection for the banks
from lawsuits filed by aggrieved borrowers or buyers of mortgage-backed
bonds."   Les Christy CNNMoney


OldBob
OldBob like.author.displayName 1 Like

So what's wrong with a little fiscal responsibility?  Banks can continue to make "creative" or "innovative" mortgages - the government just isn't going to insure those banks against their own bad bets biting them in the butt.  Sure, Mr. Banker, go ahead and lend a million bucks to Joe Schmo who only makes $35K/year!  Give him interest-only payments, teaser rates, the whole kit-n-kaboodle of ways you've got to screw someone over bigtime!  Just don't expect We The People to bail your sorry ass out when your risky loan goes south...

JamesWordsmith
JamesWordsmith

Dan Kadlec makes an excellent point:   Chronic government dependence is the long-term, harmful consequence to relying upon a nanny-state Federal Government to oversee individual's financial affairs.   Rather than raising standards of individual responsibility and financial education, this kind of mandate dumbs-down the system and society.

Other Federal programs started out with a worthy cause, but evolved into a unsustainable boondoggle:  Social Security started out as a safety-net for the truly needy senior citizens, now it is an expected entitlement that the majority of senior citizens NEED for retirement.  Medicare followed the same path.   Now....ObamaCare is a safety-net for the uninsured, but it is morphing into another basic entitlement that the majority will soon become dependent upon. 


XarkGirl
XarkGirl

Wow. How condescending is this?! Maybe instead of decrying the stupidity of "financial illiterates" we could require plain English documents,that do not require attorneys to explain the thereto's, herein's, and other inexplicably obtuse language,. Perhaps we could have simple policies and terms that aren't written by institutions with no interest in being understood.  Read your mortgage lately? How about your credit card terms? Tried to file quarterly estimated taxes for your LLC partnership (state and federal, of course.) It's esoteric knowledge deliberately made complicated by people who have no interest in simplicity.The big payoff comes when people fail to meet the terms.   The system couldn't care less about explaining itself to ... Those People.  The contempt expressed by the tone of this piece and no doubt the comments that will follow prove my point. By all means, hold people accountable. But don't exclude the financial industry when you're throwing blame. There's plenty to go around. 

garyk176
garyk176

Yes, I've read my mortgage, and my credit card terms.  Pretty straightforward - just needed to be able to read and think.  Those who don't want to do that, shouldn't commit themselves to something they don't understand - stick with cash.  Life is complex - those who don't want to deal responsibly with complexity should keep their lives simple, but accept they don't get the benefits of mastering the complexity.  It's time to be adults instead of children.

ABC123
ABC123

@garyk176 Better yet, pay your bills and then you don't have to worry about the fine print.  Or, said another way, don't buy things you can't afford just because you want them.  That seems to keep me out of trouble.

garyk176
garyk176

ABC123 - Agree!  The other concept is that people used to understand that life has risk, and they made rational decisions to avoid risk . . . thus ensuring their ability to pay their bills.  Today, people believe that they have a right to be protected against risk, and so proceed as though risk doesn't exist.  Sure I can pay my bills today, but I tailor my bills so that I can continue to pay them if a few things go wrong - which they will.

ABC123
ABC123

Thank you, Mr. Kadlec, for talking about the real issue.  The issue is not "big, bad banks" but rather a significant portion of the American public that has grown fat, dumb, and lazy.  Government behavior for the last few decades basically reinforces the human tendency (which starts in early childhood) to blame others for their own circumstances and bad choices.  The government has become nothing more than a drug pusher to the masses - the drug it pushes is the message that no matter how badly you behave, you will not be penalized or forced to change that behavior. There is always someone or something else at fault, rather than you. That message is what many seem to want to hear, but unfortunately, like all "collectivist" systems, this system will eventually collapse under its own weight. 

XarkGirl
XarkGirl

I have to agree with you on the whole "no badly how you behave, you will not be penalized or forced to change that behavior." But with a good crop of senators like Elizabeth Warren, a better Treasury Secretary, and another four years of PBO, maybe we can finally hold Wall Street accountable for their reckless and risky actions that threatened the economy of our country. The fines for illegal foreclosures are a great start.  

ABC123
ABC123 like.author.displayName 1 Like

@XarkGirl You're missing the point.  The drug feels good to people like you, but in the end, you lose because there's no free lunch.  That's what you need to start thinking about - you cannot have a system designed around taking from one group and giving it to another. Period.  By the way, Elizabeth Warren is about as good an example of the drug pusher as there ever was (though not surprisingly I'm sure her net worth runs into the low millions - funny how that is, huh?).

XarkGirl
XarkGirl

I get your point. Because I say that it is a more complicated discussion than simply blaming someone else,  i must be one of those fat, dumb, lazy Americans who doesn't pay her bills, wants stuff for free,  doesn't understand financial lingo and needs you to tell me to "start thinking." All or nothing. Black or white. Your way or the highway and a big dose of personal insults for the ride. No worries. I won't be back. It's clear there's nothing to discuss.