New Mortgage Rules to Prevent Another Housing Crisis as Refinance Rates Hover Above Record Lows

The Consumer Financial Protection Bureau (CFPB) has finally released new rules on mortgage loans to help protect consumers and prevent another housing crisis. Some of the new rules include prohibiting deceptive teaser mortgage rates or loans that require no documentation from the borrower. These were already in place as "best practices" since the housing bust but now those are stringent rules lenders are required to follow.

The CFPB rules to Protect Consumers from Irresponsible Mortgage Lending take effect in January 2014. The new rules also include limits on interest-only mortgage loans and negative amortization mortgage loans. With the latter, the balance due grows over time which might cause the homeowner to have negative equity in their home.

Mortgage lenders can continue to make these types of mortgage loans but the new rules laid out by the CFPB will not protect lenders from potential lawsuits by the borrowers. Other rules include preventing lenders from charging borrowers excessive upfront fees and points. Lenders can't charge points and fees greater than 3 percent of the total loan amount or, for smaller loans, the amount specified in the regulation.

Lenders are required to make sure borrowers actually have the ability to repay the loan they're applying for and can only lend a certain amount based on the borrower's income. Known as the debt-to-income ratio, lenders can't saddle borrowers with loans that, combined with other monthly expenses, exceed 43 percent of their income. This is slightly less than the existing standard of 45 percent. Lenders also won't be able to offer loans that exceed terms of 30 years, a practice most lenders have already abandoned.

Back during the housing bubble, you could find many lenders offering 40 year mortgage rates. These days most lenders only advertise fixed mortgage rates on 30 year loans and 15 year loans. Mortgage rates today on both loan terms are just above record lows and will probably reach new lows in 2013.

Mortgage lenders have over-corrected lending standards since the housing bust and are holding back the housing recovery. Lenders have also been more stringent with lending in anticipation of the new lending standards. Now that the new rules have been laid out and the guidelines are in place, lenders will hopefully find the new standards will enable more borrowers to qualify for loans and help the housing market recover.  The Federal Reserve has driven current mortgage rates to record lows to help stimulate housing demand and enable millions of homeowners to refinance their current mortgage.