According to numbers, consumer borrowing in America is out of control. In fact, borrowers who raised money to mortgage a house spend majority of their income on paying off their mortgage and other loans.
To address this uncontrolled consumer debt, a federal proposal, set to be finalized before the close of this year, would like to make borrowing tougher. This federal housing proposal puts strict limitations on cheap mortgages available in the market. The proposed housing regulation aims to halt another housing crisis. It prevents unqualified borrowers from availing of mortgages and loans with higher interest rates and fees.
These restrictions are apart from other conditions previously unveiled by the government such as the 20 percent down payment required to qualify for the cheapest mortgage deals.
This plan has once again captured the spotlight owing to it as added burden for home buyers.
Although lending companies and banks consider indebtedness as a factor in approving loan applications, the acceptable levels and guidelines were virtually out of the government’s control. With the competition in the midst of these companies, lowering loan approval threshold has been significantly compromised. This has led into the widespread house mortgages and subsequent foreclosure across America.
Furthermore, mortgage companies have offered exceptions for borrower who gave huge down payments and have significant assets offsetting the real intention of the set guidelines.
Financing companies have also set ineffective borrowing guidelines which were not actually enforced because they were considered useless in predicting the likelihood of default in the future. For example, a borrower may enjoy stable income today but what if he quits work and stayed home. Who pays the loan?
Economists say that lenders can’t simply anticipate the flow income as it is a volatile factor.
What matters most, according to Greg McBride, a chief economist at Bankrate.com, is the “residual income” which is based on the family’s monthly income. For example, a family earning $10,000 every month with a mortgage worth 25 percent of their income will still have at least $7,200 left for spending. On the other hand, a family that makes $4,000 every month will only have $2,900 left for spending thus smaller margin for error.
In the proposed housing regulation, residual income is considered ineffective in determining the borrowers’ ability to repay their mortgage.