Should debt-laden buyers be handed mortgages?

That’s the subject of a crucial but little reported tug of war going on between the fledgling Consumer Financial Protection Bureau and the real estate industry.

The National Association of Realtors is furiously lobbying against a range of new regulations it contends will further restrict the flow of credit to prospective home buyers.

Some of this stuff is a bit arcane. That said, a provision being mulled by the fledgling new federal agency – one that would cap how much outside debt a prospective buyer could bring to the table – is anything but obscure.

The new federal consumer bureau wants to cap the amount of debt a prospective home buyer could take on to 43 percent of total income. The norm is typically 36 percent.

Sounds pretty common sense to me, but, then again, I don’t make my living selling homes. In fact, if your debt to income ratio hits 43 percent, “financial difficulties are probably imminent unless you take immediate action,” according to a guideline put out by U.S. News & World Report based on the “The Ultimate Credit Handbook.”

Hit 50 percent and you are told to “get professional help to aggressively reduce debt.”

Not so, contends NAR, which contends 20 percent of today’s home buyers wouldn’t qualify if home buyers can’t be allowed to surpass the 43 percent debt-to-income ratio. (The trade group attacked the provision in a letter to Ben Bernanke, arguing that new restrictions on mortgage lending could help defeat the Fed’s massive new $40- billion-a-month effort to keep lending rates at rock bottom levels.)

OK, if the real estate recovery hinges on heavily debt laden buyers being encouraged to take on even more debt, we are in a lot of trouble then.

Maybe I am missing something. But how it is a good thing that we have a significant chunk of new home buyers out there with roughly half their income going to debt payments?

It’s conceivable some of these newly minted homeowners will find a way of muddling through should the real estate market and economy continue to stumble forward.

But should the European debt crisis explode or another recession hit, it seems likely we are looking at the next wave of foreclosures.

Scott Van Voorhis

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