Over the past few months there has been a myriad of proposals aimed at streamlining the mortgage lending process, protecting consumers, and preventing another crisis within the industry. There is now another proposal to add to that growing list.
The Washington Post reported yesterday, June 8, that a new federal proposal is targeting the total debt of a mortgage borrower and would place restrictions on the mortgage products for which certain borrowers would qualify. In essence, this proposal would place limits on the total amount of debt that borrowers could have as a percentage of their gross monthly income. This would include credit card debt, automobile loan payments, student loans, and the like. The limit for total debt being proposed is 36 percent of the gross monthly income, with no more than 28 percent attributed to the mortgage loan itself.
Under the proposal, if borrowers do not meet the debt requirements, they are not ultimately barred from obtaining a mortgage loan. Rather, they are not eligible for the cheapest or most attractive loan terms. The idea is that only the most qualified borrowers will be eligible for the cheapest loans and thus, borrowers with more “risk” will see higher interest rates, less attractive terms, and possibly be forced to pursue a more modest home purchase.
Critics assert that this proposal would seriously limit the ability of many borrowers to enter the market and could halt any meaningful rise in home prices. Supporters argue that the more stringent debt requirements would help to quell the foreclosure issues the country is now experiencing and prevent another subprime meltdown by making sure that mortgage backed securities (MBSs) are based on the highest quality loans.
For its part, the proposal does identify that some creditworthy borrowers may be inadvertently penalized. The restrictions would not apply to loans guaranteed by the FHA, Fannie, or Freddie. The plan should be finalized in approximately one year and anticipates less of a government presence as the market and economy stabilize and the United States heads further into a recovery.