Will consumers who take out a mortgage have a better shot at actually being able to repay that mortgage under some new rules?
Long before the financial meltdown, the question would have seemed silly. Who, really, would give you a mortgage if you had no chance ever of making the payments on it?
Unfortunately, we learned the answer to that the hard way. Plenty of lenders made mortgages to people who could not pay the money back. Worse yet, thousands of troubled homeowners discovered they could not sell the house to cover what they owed once bad times hit.
We had a housing market that was reckless about lending money, said Richard Cordray, director of the Consumer Financial Protection Bureau, in a statement.
The assumption was that home values would always go up. Lenders could off-load virtually any mortgage onto the secondary market, no matter what.
Granted, since the housing bubble burst, it's been far tougher to get a mortgage as lending standards shifted to a tighter extreme.
Now, finally, experts say we're in the early stages of a housing recovery. But consumers might be wondering what it will take to make it easier to get a mortgage.
So there are concerns if new restrictions could contribute to making mortgages hard to get and if low-income families would face greater difficulty.
The consumer watchdog agency is inviting comment on proposed amendments that would offer some exemptions to the new rules, such as exempting nonprofit creditors that work to help low- to moderate-income consumers obtain affordable housing.
The new ability-to-repay rule won't take effect until a year from now. It's designed to help ensure that responsible consumers get responsible loans, according to the consumer watchdog agency.
The consumer bureau was created under the 2010 Dodd-Frank Act, which addressed the troubles created in the financial meltdown.
Michael Calhoun, president of the Center for Responsible Lending, said in a statement that the new rules strike a balanced approach, for the most part.
The rules preserve legal protection for borrowers with the riskiest loans, he said.
In the past, Calhoun said, some families were too often steered into abusive financial products.
The American Bankers Association noted that the rule will still provide most consumers access to safe credit but also warned that the rules would transform lending practices and could restrict access to credit for some consumers.
A qualified mortgage under the ability-to-repay system is one that meets certain standards to indicate the borrower should be able to repay that loan; lenders would have more protection in the case of legal disputes if they followed the standards. Lenders could make loans that aren't qualified, but some experts say that's not likely.
Under the new system, loans that meet separate federal standards also would be permitted for the first seven years. There's no rule here setting a minimum down payment for the house or a minimum credit score.
Under the ability-to-repay rules, creditors would have to consider a borrower's income and employment, among other factors.
The general rule requires monthly payments be calculated based on the highest payment that will apply in the first five years of the loan.
Teaser rates would not be able to mask the true cost of a mortgage, according to regulators.
The lender would need to consider the consumer's ability to repay both the principal and the interest over the long term.
A borrower's total debt payments could not exceed 43 percent of their pre-tax income. The idea is that a borrower would not be granted a qualified mortgage if 43 cents of every dollar of income must be dedicated to debt payments, including a mortgage.
Many loans made recently already meet that standard, according to regulators.
Such rules, of course, are part of the backlash of a housing market gone wild.
Cordray pointed out some housing stories in his statement.
Cordray said that a California man wrote the consumer bureau, saying his house was in the process of being foreclosed on and he was desperate.
During the housing bubble, the California man made $50,000 a year but was sold a mortgage for more than a half a million dollars.
The bureau heard from a Michigan couple with credit scores in the 800s who wanted to refinance their home at current low rates.
The home is now worth much more than the original mortgage loan.
Yet, Cordray noted, the Michigan couple said they could not get approved because there were no comparable sales in their neighborhood during the previous 12 months.
Will the ability-to-repay rule help get the mortgage market back on track? Maybe bring more clarity to the process? We can certainly cross our fingers as lenders double-check the numbers.
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stomporfreepress.com.