Federal proposal would toughen debt restrictions on mortgages

The Washington Post reports:

Consumer borrowing is so rampant in America that most people who took out a mortgage last year to buy a home ended up spending more than a third of their income to pay that loan and other debts.

Now, a federal proposal would target these borrowers by making it tougher for them to get the cheapest mortgages. The initiative is part of a broader measure that aims to prevent another foreclosure crisis and could confront borrowers who do not meet certain conditions with higher interest rates and fees.

The debt restrictions are on top of other conditions, including a requirement that borrowers pony up a 20 percent down payment to qualify for the cheapest mortgages.

While the down payment condition has captured the public spotlight since the government unveiled its plan in March, experts who track the housing industry say the proposed debt limits could be just as onerous for borrowers.

“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 favorable rates.”

The proposal not only restricts a borrower’s total debt — including credit cards, auto loans and student loans — to 36 percent of gross monthly income. The measure would also limit the mortgage payment itself to no more than 28 percent of a borrower’s gross monthly income.

As we've said before: real estate is overpriced in many areas, even today.