According to several news reports, final rulemaking on the issue of what will really constitute a qualified mortgage in the United States starting in 2013 is coming down to the wire, and mortgage lenders stand to benefit the most in terms of legal protections from consumers.
The proposed rules are being coordinated by the Consumer Financial Protection Bureau. Entities weighing in with their opinions include the Federal Reserve, consumer advocacy organizations, financial regulators, and mortgage lending industry groups. The goal is to properly define a qualified mortgage, which boils down to a home loan that enjoys government approval.
Casting a Shadow of Doubt
According to an opinion piece by John Carney of CNBC, the rulemaking process thus far bodes well for lenders insofar as to shield them from litigation from consumers. Banks do not like being tied up in court and having to defend themselves against claims from borrowers, and it seems as if qualified mortgages will protect them in this regard. Banks have been a mainstay presence in courtrooms across the country since 2008, but they haven't been facing consumers as plaintiffs so much. Regulators and investors have rightfully pounced on banks, and no amount of mortgage rulemaking will ever free them from these claims.
The problem Mr. Carney sees with qualified mortgages is that they fail to properly address the issue of risk. History has proven that financial regulators have not been too adept at evaluating risk, mostly letting banks trust credit rating agencies like Moody's and Standard & Poor when it comes to guide their mortgage origination and securitization process. Banks have been rightfully conservative in mortgage lending since the 2008 debacle, but now that the housing market is in recovery mode, they are raking in profits from loan production and passing on the costs to borrowers. The banks are ready for more of this.
The Qualified Residential Mortgage (QRM)
Aside from the qualified mortgage, rulemaking officials are also discussing QRMs, riskier home loan products that banks can pile on up to five percent of their portfolios. This would be an acceptable level of risk for banks, but for large financial institutions it could amount to millions of dollars in loans that are riskier than the qualified mortgages they will be legally protected from.
The problem with both qualified mortgages and the riskier QRMs is that their rulemaking process is subject to politics and lobbying from parties who have a significant stake in them. Borrowers have little input in the rulemaking, and they will no longer be able to go to court when they are the victims of wrongdoing by their mortgage lenders. As long as Wall Street holds a major interest in the U.S. mortgage market, the risks will be considerable.