In a move that may radically change the housing market, the federal Consumer Financial Protection Bureau on Thursday unveiled new rules designed to essentially ban the kinds of high-risk loans that contributed to the housing bubble and the devastating crash that followed. Lenders will be barred from offering deceptive teaser rates that can lure borrowers into loans they can't afford. Banks will also have to verify homebuyers' ability to keep up with their mortgage payments. The aim of the sweeping rules, says Edward Wyatt at The New York Times, is to prevent a recurrence of the "unbridled frenzy" in lending that occurred when banks could rush to issue mortgages and then resell them, making a bundle regardless of whether the loans were ever repaid. Plus, with clear rules in place, banks will be protected against complaints of abusive lending, creating, in theory, a win-win for lenders and borrowers.
The government is essentially doing nothing more than requiring a little common sense and caution from everybody, says Danielle Douglas at The Washington Post. Of course, there's a catch. The "ability-to-pay" rules, which take effect next January, will make it harder for some people to get help realizing the American dream of owning a home.
In the run up to the meltdown, banks relaxed lending standards by failing to verify income, glazing over credit history or issuing mortgages with skyrocketing interest rates. The result was hundreds of thousands of homeowners who were ill-equipped to manage their mortgages once the market tanked.
But the provision is generating angst among some industry officials and consumer advocates who say that it could have unintended consequences that would harm the mortgage market or borrowers. Lenders say that if the rule is too restrictive, it will become even harder for lower-income and first-time home buyers to get mortgages. [Washington Post]
Well, borrowing might get harder for some, but it could get easier for others, says Brad Thomas at Seeking Alpha. High-risk borrowers might very well be out of luck. But the new rules could make it easier to get a mortgage for qualified buyers who can afford to make their payments, by reassuring banks that have become skittish about making loans.
The meat on the bone for Bank of America and other mortgage lenders is that if they follow the framework, they will be "shielded" from litigation liability.
I believe that this could spur Bank of America to actively re-grow their mortgage business, but in a safer and less risky way than ever before. [Seeking Alpha]
All the government is doing, says Ed Morrissey at Hot Air, is telling lenders they can go back to observing "rules they liked before the government forced them to stop using them." It was the government that stuck its nose into lenders' business in the 1990s with the Community Reinvestment Act and later with incentives for the subprime lending that inflated the housing bubble.
Now the government is intervening once again, in order to prevent lenders from doing what the government pressured them to do over a ten-year period, in order to avoid another collapse. This isn't a bad idea, conceptually, but I have a better proposal. Why not just get government out of the lending business and let the people whose capital is at risk decide how to invest it and lend it? Had we done that from the beginning, we never would have have the bubble in the first place. [Hot Air]