The regulatory explication proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique compulsion mechanism, and the second is to growth the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level. A detailed conference of the text follows:
Loans for the buy or refinance of residential real estate secured by a mortgage and recorded in the group description are slight by the following parameters based on the borrower's documented revenue and normal indebtedness and the appraised value of the property at the time of sale or refinance:
1. All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
2. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower's gross income.
3. The total debt-to-income of all debt obligations cannot exceed 36% of a borrower's gross income.
4. The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the buy price, whichever value is smaller except in specially sanctioned government programs.
Any sums loaned in excess of these parameters do not need to be repaid by the borrower and no contractual provision is permitted that can be interpreted as limiting the borrower's right to exercise this right, make the loan callable or otherwise abridge the mortgage agreement.
This last statement is the most critical. This is how the compulsion problem can be overcome. Regulators are pressured not to levy laws when times are good, and decried for their lack of oversight when times are bad. If the oversight function becomes a potential civil matter policed by the borrowers themselves, the lenders know exactly what their risks and potential damages are. Any lender foolish enough to make a loan covering of the parameters would not need to fear the wrath of regulators, they would need to fear the civil lawsuits brought by borrowers eager to get out of their contractual obligations. If any borrower could regain debt forgiveness by simply proving their lender exceeded these guidelines based on the loan documents, no lender would do this, and regulatory oversight would be practically unnecessary.
One key to development this work is to prohibit lenders from introducing a "poison pill" to the loan documents that would make borrowers hesitant to bring suit, otherwise lenders would make their loan callable in the event of a legal challenge forcing the borrower to refinance or sell the property. Basically, if the borrower brought suit and won, they would see significant allowance equal to the deviation from the standards, if they brought suit and lost, they would have no penalty. Most of these cases would be decided by summary judgment based on a narrate of the loan documents thus minimizing court costs.
The ensue of these restrictions will be that all homeowners will have at least 10% equity in their properties unless they have borrowed from a government program like the Fha where the combined-loan-to-value can exceed the limits. This equity cushion would buffer lenders from predatory borrowing and a huge growth in foreclosures if prices were to decline. Home equity in the United States has been declining since the mid 1980s, and it indubitably declined while prices rose while the Great Housing Bubble due to the rampant equity extraction. The lack of an equity cushion exacerbated the foreclosure problem as many homeowners who owed more on their mortgage than the house was worth simply stopped development payments and allowed the house to fall into foreclosure.
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