In the aftermath of the crisis, the biggest banks including Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) withdrew from sub-prime mortgage market and now more than 90% of all loans that are originated are GSE and FHA loans.
Still, he expects the rule to be a modest positive for housing and mortgage originators because it provides some clarity on the future of mortgage lending.
The rules are expected to pave the way for a standardized mortgage market in the future, where 30-year fixed rate mortgages will dominate, while no-doc loans and balloon loans will be a thing of the past.
Banks have indicated that they will largely stick to qualified mortgages given the enhanced legal protection associated with them.The protection from unnecessary litigation should, however, incentivize banks to loosen credit that has been overly tight. "All of the Ability-to-Repay provisions will help establish the principles of responsible lending for the mortgage market as it recovers from the financial crisis," Cordray said in prepared remarks. " But you cannot have responsible lending unless you have lending in the first place, and the mortgage market as it stands today has tightened so much that many consumers cannot borrow to buy a home even with a strong credit history." " We can draw up the greatest consumer protections ever devised, but if consumers cannot get credit, then there is nothing to protect. Our goal here is not only to stop reckless lending, but to enable consumers to access affordable credit." In providing legal protection to banks, the CFPB makes a distinction between prime and sub-prime loans, offering a "safe harbor" to lenders for lower-priced loans made to borrowers who pose fewer risks. If a low-priced loan goes south, lenders will be considered to have legally satisfied the "ability-to-repay requirements". The consumer can still legally challenge the bank in court by arguing that the loan does not meet the definition of a qualified mortgage. For higher-priced loans made to borrowers with a riskier profile- sub-prime loans- lenders will have less legal protection. If the loan goes south, the consumer can rebut the presumption that the banks met the ability to repay standard. They can prove in court that the lender did not consider their living expenses after their mortgage and debts.
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