Richard Cordray, head of the Consumer Financial Protection Bureau, helped create regulations that will protect the country from another financial crisis. PHOTO: Reuters
It only took five years, but we finally have some sensible regulations on lending to home buyers. The Consumer Financial Protection Bureau (CFPB) established these rules to provide certainty and stability to a market that crashed the entire economy in 2008. The rules place restrictions on loans with teaser rates, which start out affordable and balloon upward. Lenders will be required to inspect borrowers finances (something they forgot to do for a solid decade) and are discouraged from offering annual payment plans that will cost more than 43% of the borrowers annual income (if they exceed this threshold, they are liable to be sued if the borrower defaults).
Here's why this matters even if you never plan on buying a home: had these rules been in place a decade ago, we might have avoided the entire financial crisis we that we are still not out of. In the years leading up to 2008, the housing market essentially became a massive pyramid scheme in which deceptive and seductive contracts were used to draw thousands of people into home loans that they could not afford (except for the no money down part), because lenders could then package bundle of loans, which would mysteriously but consistently be given a triple A rating by ratings agencies, and then sold off again, often multiple times. Eventually the music stopped and the economy crashed. Five years later we have some regulations to help prevent a repeat.
The mortage industry, which is now insulated from lawsuits provided that they stay within certain bounds, expressed enthusiasm over the certainty this provides, but were a little sad that things won't be as wild and randy as they were in the 2000s:
"It will add some certainty to the mortgage industry about what the rules of the road are going forward," said Guy Cecala, president and CEO of Inside Mortgage Finance, a trade publication. "But it basically says we want everybody to make plain-as-vanilla mortgages."
And for 99% of America, that's a good thing.