New CFPB mortgage rules may prevent future bubbles

Tools

It's been four years since the mortgage meltdown began in earnest, and we're just now getting around to passing some rules that disallow the most destructive mortgage types, the ones that wreaked the most havoc on consumers and the economy.

It took the creation of the Consumer Financial Protection Bureau, which was mandated by Dodd-Frank, to arrive at this point. Unsurprisingly, the new rule set will nix negative amortization, stated income, excessive points and other types of controversial loan features. It all falls under the umbrella of an "ability to pay" concept that calls for banks to ensure that the loan is appropriate for the client. If they satisfy these requirements, lenders will be given legal "safe harbor" that will protect them from suits.

This strikes me as roughly akin to the suitability requirement that brokers must abide and might strike some as too little, too late. The fact is that the volume of these types of loans--at least the most pernicious types--has drastically declined. The negative publicity and regulatory attention has made lenders loathe to offer them. Subprime loans still exist, and there's still decent demand from those who have no choice but to pay for them.

Overall, the loan landscape has trended back to safer fare, but the rules are important in this respect: The market will heat up again, and when it does, there will be rules in place to prevent shady operators from once again taking advantage of the hot market to sell dubious loans. The new CFPB rules will hopefully keep future bubbles from inflating at inappropriate rates.

For more:
- here's an overview article from the TheStreet.com

Related articles:
Legal protection for banks on mortgages coming soon
 

cloth