Tuesday, January 08, 2013

Basic Mortgage Rules

This is a list of the fundamental rules that should apply to all mortgages, at least if we want the housing market to be part of the foundation of the economy.  Any relaxation of these rules, at least given our current monetary system, threatens to undermine the entire system.

1. 30 year fixed rate.  No  more variable rate mortgages.  If someone signs to buy a house, it needs to be a fixed rate for the entire length of the mortgage.

2. Max 30% of household income.  If someone doesn't earn enough to pay the calculated mortgage payment based on the 30 year fixed rate, then they can't afford the house and should not qualify for the mortgage.  It's just too hard on families to have 40%, 50% or more going into housing.

3. Minimum 20% down payment.  Saving money is a critical skill, and if someone can't save up money to pay a down payment on a home, then they don't have a handle on their finances well enough to be a secure credit risk.

4. Mortgages may not be sold to other banks.  No more mortgage backed securities or derivatives.  If a bank goes out of business, that's another can of worms, but a bank should be held to the risks of the loans they issue.

These are severe restrictions on the current housing market.  I know that.  I also know that foundation level rules like this create a way to prevent people crashing through the floorboards and our entire economy held hostage by foolish investors who don't live in or care about the communities they are lending to.  It's just too expensive not to establish rules like this.

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