12.18.2007

Reasonable mortgage rules

When Mortgages Made Sense: Should we go back to using the old-fashioned rules for lending?

Excerpts:

Before the 1930s, many home loans lasted only five years, with borrowers required to make a large "balloon" payment at the end of the term. Homeowners with these loans faced big trouble during the Great Depression, so lending practices changed. Longer-term mortgages (usually 20, 25 or 30 years) became standard, and balloon payments became the exception rather than the norm.

...

During the 1950s and 1960s, Greenstein put borrowers almost exclusively into these FHA and VA loans. They carried a fixed-rate of interest—usually 4 or 4.5 percent. Every borrower underwent a thorough credit check (a laborious process in the days before computers and lightning-fast online approvals). Like all lenders, Greenstein relied on strict ratios to determine how much money someone could afford to borrow. A person's mortgage payment (including taxes and property insurance) couldn't exceed 28 percent of his monthly income. When you added together the family's car loan and the mortgage payment, the total should be below 36 percent of income. "It wasn't set in stone at 28/36; you could make judgment calls," he says, but most borrowers were held to those limits. What about credit card payments? That was rarely an issue, since credit cards didn't start catching on until the late 1950s.

Wikipedia: Debt-to-income ratio

Comment: The crazy increases in home prices are a result of cheap credit and loose lending standards! The housing market is reaping what the mortgage industry sowed!

Fed endorses rules to curb shady lending

Summary:

The Fed, which has regulatory powers over the nation’s banking system, is proposing:


  1. Restricting lenders from penalizing certain subprime borrowers — those with tarnished credit or low incomes — who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase.
  2. Forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance.
  3. Barring lenders from making loans when they don’t have proof of a borrower’s income.
  4. Prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value.


...
When the housing market went bust, subprime loans were most heavily affected.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

When home values weakened, borrowers were left with loan balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.

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