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 affects borrowers whose total debt — including credit cards, automobile loans and student loans — is more than 36 percent of gross monthly income. It also would affect borrowers whose mortgage payment alone is more than 28 percent of their gross monthly income.
Nearly three out of every five U.S. borrowers who bought homes last year would not have met the proposed restriction on total debt, according to an analysis by mortgage research firm CoreLogic.
A separate federal analysis showed that more than half of buyers whose loans were sold to Fannie Mae and Freddie Mac in 2009 would have fallen short of one or both of the two debt requirements.
Todd Pearson of Ashburn worries that in a few years, such rules would shut someone such as him out of the market. Pearson wants to sell his house and buy another in Chevy Chase. He says he has no debts other than his mortgage. But he figures his mortgage payment alone would exceed the threshold proposed by the new rules.
While Pearson said he’s all for reforming the housing finance system, he would prefer that regulators look at many factors overall when scrutinizing borrowers.
“Why not look at my credit score, my salary and everything else?” he said.
The new proposal aims to make sure that mortgage-backed securities, which contributed to the financial crisis, are based on high-quality loans. It seeks to do this by requiring firms that securitize mortgages to retain a stake in those loans instead of selling them all off.
Loans made to borrowers who meet stiff conditions, such as the debt restrictions, will be exempt. Bank executives say the cost of retaining a stake in the rest of the loans will be significant and will be passed on to borrowers through higher fees and interest rates.
The proposed rules would not apply to loans backed by the federal government — including those guaranteed by the Federal Housing Administration, Fannie Mae and Freddie Mac. These loans now account for most of the mortgage market. But the government role is expected to shrink dramatically as the housing market returns to normal.