By Daniel Indiviglio
WASHINGTON, Jan 10 (Reuters Breakingviews) - New mortgage
rules may herald a kind of housing turn in the United States.
Some five years after the real estate bust, the Consumer
Financial Protection Bureau has unveiled provisions to shield
creditors from borrower lawsuits. In an industry plagued by
litigation, the new "qualified mortgage" distinction should help
lure investors back. The regulation might not prevent another
bubble, but it's an integral step to reshape the market.
The idea is to stop lenders from slipping back into a
subprime stupor. The rule set out on Thursday forces
underwriters to verify a borrower's ability to pay. It's
straight out of the Department of the Obvious, but the sensible
step was often disregarded and helped create the crisis.
To comply, banks must take some fairly basic steps like
verifying income, examining credit history and calculating that
a borrower can afford the monthly payment. Mortgages can't be
overly exotic either. Features like interest-only periods,
rising principal or terms exceeding 30 years aren't permitted.
The stick of potential losses on loans should be enough to
discourage banks from ignoring such fundamental steps, but the
consumer bureau now provides a healthy carrot, too, in the form
of exemption from consumer litigation. So long as the rules are
followed on so-called prime loans, such credit-worthy customers
can't sue if the mortgage goes bad. With home prices having
broadly stabilized, legal risks may be the biggest left.
The rules also help standardize mortgages. That removes a
layer of complexity and uncertainty. Additional mortgage-related
regulations are still pending, but the qualified mortgage
definition forms a foundation for the secondary market to
eventually move away from near-full government support. It makes
the major obstacle price: private capital cannot compete with
cheap federal guarantees.
The regulation doesn't, however, forbid subprime loans - it
just forces lenders to absorb a little more liability when
they're made. When irrational juices flow, even the threat of
additional litigation might seem tolerable. And while that
probably means the new rule alone won't preclude housing mania,
it should still go a long way to propel the languishing market
forward.
CONTEXT NEWS
- The U.S. Consumer Financial Protection Bureau on Jan. 10
unveiled its definition of a "qualified mortgage" as part of new
regulations that provide criteria under which lenders are
exempted from most borrower lawsuits.
- To be shielded, mortgage originators must take steps to
ensure a consumer can pay back the loan. Such underwriting
standards include verifying income or assets, examining credit
history and calculating that the monthly payment is manageable.
The rule also caps monthly consumer debt payments, including the
new mortgage, at 43 percent of a borrower's income. The loans
cannot include any toxic features, such as interest-only
periods, terms exceeding 30 years and payments so low that
principal rises. Limits are also imposed on pre-paid interest
and fees.
- If a lender satisfies the rule's criteria on prime loans,
a consumer would only have legal standing to sue that lender if
it violated other federal consumer protection laws. A lender can
still make higher-priced, non-prime loans it believes satisfy
these criteria. In such cases, consumers can only win lawsuits
by proving the creditor failed to consider that living expenses
and other debt payments prevented their ability to repay a
mortgage.
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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