Will These New Mortgage Laws Prevent Another Crisis?

More than five years have passed since the housing market collapsed, and only now are regulators addressing the manner in which financial institutions issue mortgages. As part of the reforms mandated by the 2010 Dodd-Frank law, a newly created consumer watchdog — the Consumer Financial Protection Bureau — announced new regulations on Thursday that would require lenders to verify a borrower’s ability to repay loans.

The measures will offer protection to borrowers against the lending abuses that led to the U.S. housing bubble by giving extra legal protection to banks that issue safe loan products, Reuters reported. The low mortgage standards that contributed to the bubble resulted in billions of dollars in debt for American households.

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As lenders will likely desire the additional legal protection that will accompany the safer, lower-priced loans, the regulations will be instrumental in deciding which borrowers can take advantage of low-cost borrowing rates…

To avoid further crises, the Dodd-Frank law required regulators to redefine “qualified mortgages” to be compliant with the ability-to-repay requirement. These mortgages will be given only to borrowers whose debt does not exceed 43 percent of their income. Furthermore, these mortgages will have no risky loan features, like interest-only payments or balloon payments, and will not allow fees to be more than 3 percent of the loan amount.

The system will have two tiers, enabling higher-priced loans to have less protection and lower-priced loans to have the highest level of protection. But borrowers will still be able to sue if they prove that they did not have enough income to repay the loan and cover living expenses.

While some lawmakers were concerned that the rule would worsen credit crunch problems and set back the housing market recovery, regulators told Reuters that the new measures included provisions to keep credit flowing.

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