In the past year we’ve seen a significant decline in new home purchases and the real estate market as a whole. Consumers are beginning to realize that real estate values can move in two directions rather than just sky-rocket as they have during the last few years. Fewer people are qualifying for mortgages and many people who would normally want to sell their homes are being forced to keep them because of such a glut of un-sold homes in the market. Many people who signed-up for sub-prime mortgages are now facing foreclosure, and now the government is taking action. There are now new rules for mortgage lending to prevent mortgage companies from giving loans to people who will most likely be unable to pay their mortgage.

Stated income loans, or loans in which consumers do not have to verify their income, will be disallowed under the new set of mortgage lending rules. These loans were referred to as “Liar’s Loans” and “Fake-A-Bake” loans in the industry. By using a stated income loan, many consumers claimed to make much more than they actually did so that they could qualify for a much larger mortgage than they could realistically pay off. The mortgage companies never seem to be too concerned about people lying about their incomes on these mortgage applications because they seemed to be exclusively concerned with generating a larger number of loans rather than generating loans only with borrowers who would be very likely to pay off their mortgage.

There are also new laws in place in the sub-prime lending world. In the past, lenders would offer ridiculously low opening rates so that potential home-owners could qualify for the loans, but after a couple of years, the rates would reset to something much higher and push the homeowner’s into foreclosure. Now real estate companies will be required to qualify people based on what the interest rate will be after the low-interest rate introductory period, rather than the artificially low introductory rate that the mortgage company was advertising.

There were so many loans provided to consumers that really could not afford them in the last half-decade that one in five loans made to individuals with bad credit is now in some sort of delinquency. Many of these homeowners will have to find a way to sell their homes, some will get foreclosed, and others will limp along trying to make their payment as long as they can.

These new mortgage rules will go a long way to prevent consumers that simply cannot afford to re-pay a mortgage from qualifying for ridiculous sub-prime loans.



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