(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
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.
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- 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.
- CFPB factsheet: link.reuters.com/sun25t
- Reuters: U.S. consumer watchdog tightens mortgage lending rules on banks [ID:nL1E9C980M]
Reform at last [ID:nL1E8NL5JE]
Home-cooked lawsuits [ID:nL1E8NK3C3]
Decent effort [ID:nL1E8M21YY]
- For previous columns by the author, Reuters customers can click on [INDI/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
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