Should Mortgage Lenders Tighten Mortgage Approval Standards?
As more homeowners fall behind on their mortgage payments, the debate is heating up over whether lenders should be required to ensure that the loans they issue are suitable for their customers.
Just what is a suitable mortgage is likely to depend on a borrower’s circumstances. But already, some states, including Ohio and Pennsylvania, are calling on mortgage lenders and home mortgage brokers to do their best to put borrowers in loans that they are able to repay. Toward that goal, federal banking regulators last week proposed guidelines for lenders who issue adjustable-rate mortgages to subprime borrowers.
Congress also is taking a close look at mortgage lending practices, with consumer groups pressing lawmakers to impose a suitability standard on lenders.
The Mortgage Bankers Association, which says a suitability requirement would make mortgages more costly, is working on voluntary disclosure standards for its members aimed at making it easier for borrowers to understand the pros and cons of various loans. But mandating lenders to consider a loan’s suitability likely would force them to make only the most conservative loans, says Kurt Pfotenhauer, a senior vice president of the association. Lenders will “deny credit…to people who deserve credit,” he says.
Suitability standards exist elsewhere in the financial-services industry: Securities brokers and brokerage firms are required to have reasonable grounds for believing that investments such as stocks and bonds are suitable for their customers’ financial status and investment objectives.
Imposing similar requirements on mortgage lenders, proponents say, would help homeowners such as Joseph Ripplinger, a former construction worker. Mr. Ripplinger was happy to mortgage refinance when his broker late last year offered a loan that would lower the Minneapolis resident’s monthly payments.
“He told me he could get me a good deal because my credit is a lot better,” says Mr. Ripplinger.
What Mr. Ripplinger wound up with was a loan called an option adjustable-rate mortgage, which offers a low introductory interest rate but the loan balance can grow over time if the borrower regularly makes the minimum payment. Given his monthly income from Social Security and disability payments, Mr. Ripplinger says it will be hard to keep current on his loan as his payments begin to climb over the next few years.
“I believed him when he told me it was a good deal, but I guess it wasn’t,” Mr. Ripplinger says. He plans to testify on Friday before the Minnesota House of Representatives, which is considering mortgage legislation.
“It’s not suitable to put someone in a loan they can’t pay back or if it’s going to be unaffordable in two years,” says Jordan Ash, director of the Acorn Financial Justice Center in St. Paul, Minn., an advocacy group.
The heightened focus on mortgage suitability comes as delinquencies are on the rise. Some 2.51% of mortgages were delinquent in the fourth quarter, the highest level since early 2002, according to Equifax Inc. and Moody’s Economy.com Inc. Lenders also are being affected. A growing list of lenders that cater to borrowers with scuffed credit records have shut their doors.
Other lenders are tightening their standards, making it harder for some individuals to refinance home loans or buy a home.
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