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 too 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 ones 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.