Economic Outlook: New mortgage rules

By ANTHONY HALL, United Press International  |  Jan. 10, 2013 at 10:27 AM
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The government consumer protection agency Sen. Elizabeth Warren, D-Mass., is credited with dreaming up is about to redefine the mortgage game.

Talk about a buzz kill. A new set of rules, some of which have been in the works for years, "will add some certainty to the mortgage industry about what the rules of the road are going forward," said Guy Cecala, president and Chief Executive Officer of the trade publication Inside Mortgage Finance, the Chicago Tribune reported.

As it does that, "It basically says we want everybody to make plain-as-vanilla mortgages," Cecala said.

The new rules the Consumer Financial Protection Bureau is set to announce Thursday forbid balloon payments, loans that go longer than 30 years and lending to borrowers with total debts more than 43 percent of their gross income. It also bans loans in which the principle rises and interest-only mortgages.

With a few simple rules, the agency is taking away some of the gimmicks and some of the gray areas that allowed the supposed protectors of the financial system to turn into predators.

Of course, policing a system in which lenders make money and borrowers end up owning a house will be viewed from the point of view of winners and losers, which can displace the simple idea that a failed mortgage ends up with both lenders and borrowers on the short end of the stick. Conversely, a successful loan makes everybody look good.

That seems to be the strategy here. But critics will argue that it is too safe, which means too restrictive. If the only loans that go through are the ones all but guaranteed to succeed, that can only mean fewer mortgages will be written.

After the financial crisis and the ensuing economic downturn, it will be easier to agree that fewer mortgages could be a good thing. Some borrowers, however, will feel they are up for taking a bigger risk and some lenders will feel they are entitled to squeeze borrowers into a loan and hope for the best.

Likely, this is a memory test. The economic penalty of messing with mortgages is hard to forget in 2013. But consumers wait only a few months after a dangerous spike in gasoline prices to begin buying large cars again. Prosperous times do not lend themselves very well to careful rule-making. These rules are sound, but human nature being what it is, they are not solid.

In international markets Thursday, the Nikkei 225 index in Japan gained 0.7 percent, while the Shanghai composite index in China rose 0.37 percent. The Hang Seng index in Hong Kong added 0.59 percent, while the Sensex in India dropped 0.02 percent.

The S&P/ASX 200 in Australia rose 0.32 percent.

In midday trading in Europe, the FTSE 100 index in Britain was up 0.16 percent, while the DAX 30 in Germany gained 0.55 percent. The CAC 40 in France was flat, falling less than 0.01 percent, while the Stoxx Europe 600 rose 0.01 percent.

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