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New federal rule to prevent mortgage crisis: how it affects you

The Consumer Financial Protection Bureau announced it's new 'ability to repay' rule that sets guidelines for new mortgages, including limits on debt payments as a portion of income.

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A 'for sale' sign is seen outside a home in Glenview, Ill., last week. A new 'ability to repay' rule that sets guidelines for new mortgages was announced Thursday.

Nam Y. Huh/AP

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A new federal rule issued Thursday aims to make the nation safe from mortgage meltdowns like the one that ravaged the economy in 2008.

It's called the "ability to repay" rule, setting guidelines to make sure mortgage borrowers generally will be able to afford the monthly payments when they buy a home.

At the rule's core is this: A borrower's monthly debt payments shouldn't exceed 43 percent of monthly income.

The measure is being announced at a time when high-risk home loans are no longer the economy's big problem. The housing market is still struggling to recover from the massive boom and bust cycle that ended with the recession and financial crisis. Credit conditions today are relatively tight.

But this isn't a case of regulators simply fighting a previous war. Housing and credit tend to flow in cycles, and at some point the spirit of boom times and free-flowing loans could come back.

The Consumer Financial Protection Bureau (CFPB), which issued the rule, had a delicate task – to bar the door against some of the worst practices of the subprime lending era, while not stifling a nascent recovery of housing market activity at a time of still-high unemployment.

Protecting consumers from high-risk borrowing is a top concern for Democrats who supported the Dodd-Frank financial reforms after the financial crisis. That legislation created the CFPB and called for it to issue mortgage guidelines. Republicans, meanwhile, widely criticized the CFPB's creation as regulatory overkill.

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