Problems changing the mortgage-lending game
No one can predict how long the country’s housing slump will continue. But one thing is certain: The way mortgage companies lend money to borrowers will never be the same.
The latest example came earlier this week, when officials with Bank of America said they will no longer offer option adjustable-rate mortgages – loans that allow borrowers to pay less each month than the interest due on the loan — or subprime loans that go to borrowers with weaker credit ratings. You can read about Bank of America’s plans here in a story written by Jonathan Stempel for Reuters.
This story is an important one, because Bank of America is in the process of acquiring mortgage-lending giant Countrywide, which, of course, commonly offered such riskier loans. Consumer groups have lately been harshly criticizing Countrywide for putting borrowers in mortgages that have resulted in a large amount of foreclosures, and then not doing enough to help them refinance into more stable lending products.
As more banks and brokers follow Bank of America’s lead, it’s clear that the rules for acquiring a mortgage loan have changed. During the height of the residential real estate boom, borrowers with poor credit and high levels of debt could borrow significant amounts of money. They just had to pay higher interest rates. Borrowers could also grab adjustable-rate mortgages that start out with low interest rates for a set period of time before morphing into higher-rate loans. Many borrowers didn’t even have to offer documentation proving their salaries or work histories.
Those days may be largely gone, as fewer mortgage lenders want to end up in the trouble Countrywide faced before Bank of America came in with its $4 billion takeover bid. Before this move, Countrywide faced the very real threat of going under.
Are these changes good? For the large part, yes. Owning a home is a huge financial responsibility. You shouldn’t be allowed to take out a mortgage loan unless you can prove you can pay for it. And if you do happen to have lousy credit, an iffy job history and high levels of debt? You need to continue renting until you can improve your financial health. Adding the burden of a monthly mortgage payment certainly isn’t going to help those debt levels.
