With consumer borrowing in the US out of control, a new federal proposal is targeting borrowers by making it tougher for them to acquire even the cheapest mortgage.
Figures showed that more Americans who had obtained mortgages last year to purchase homes ended up spending a third of their total income on repaying mortgages. The new move is also part of a broader measure to prevent another foreclosure crisis.
Debt restrictions are among the top conditions, including a 20 percent down payment in order for borrowers to acquire the cheapest mortgages.
While the down payment condition has been in the spotlight since the US government imposed its plan in March, several experts said the proposed debt limits could prove to be onerous for borrowers as well.
“The debt limits are far and away the most binding constraint,” said Mark Zandi, chief economist at Moody’s Analytics.
“It’s probably the one thing that will knock the largest number of borrowers out of the market by keeping them from getting the most favourable rates.”
The proposal not only limits borrowers’ total debt to 36 percent of their gross monthly income but also limits the mortgage payment to not more than 28 percent of their gross monthly income.
The new proposal also aims to make sure that mortgage-backed securities are based on high-quality loans. It plans to do this by requiring banks to keep a stake in mortgage securities rather than sell them off.
The proposal, which will not apply to any loans backed by the federal government, will be finalised this year. It acknowledges that some creditworthy borrowers may be penalised. However, “incorporating all of the trade-offs that may prudently be made would be very difficult.”
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