Crummy credit, no verifiable income, no home, loan.
Beginning Thursday, that’s the rule under Federal Reserve guidelines that require lenders to prove a person’s ability to repay a loan before awarding one.
And though the regulation seems like common sense, that wasn’t always the case in the housing boom delirium that gripped the nation until the fall of 2006.
“Years ago, when all this trouble happened, they were doing loans where you didn’t have to verify income and there was no money down,” said Bobby Bashwiner, vice president for Group One Mortgage in Jupiter, Fla. “They want to make sure if you are lending money, you can verify the ability to pay, and that’s not a bad thing.”
The new rule, which was approved last year as part of the Housing and Economic Recovery Act, mostly concerns subprime loans, high-interest loans for people with weak credit.
The inability of subprime borrowers to fulfill their loan payments is largely blamed for the real estate market meltdown and foreclosure explosion.
“For the first time, the federal government is sending a clear message, saying, if you are going to make a subprime loan, you are going to have to demonstrate the borrower’s ability to pay that loan,” said Uriah King, a policy analyst for the Durham, N.C.-based Center for Responsible Lending. “This is meant to prevent what’s happening now from happening again.”
But King said he’s concerned the regulation doesn’t go far enough, leaving out adjustable-rate mortgages where borrowers can choose from different payment plans and make minimal payments that contribute nothing to the principal.
Adjustable-rate mortgages “are still essentially unregulated,” King said. “People are making a mistake when they say the market is corrected.”