With financial regulators poised to complete a new set of mortgage rules, banks will soon enjoy protection from lawsuits by homeowners.
Regulators pushing the new proposals argue that it will benefit the housing market. Their theory is that by shielding mortgage banks from possible litigation, it will help incentivize them to create greater quality home loans.
Different groups within the financial industry are concerned about the new rules for different reasons. Some real-estate agents in Nova Scotia argue that the new regulations impede growth in the housing sector by burdening creditors with too many rules.
Others are worried that the new rules shielding mortgage banks from lawsuits strip homeowners of a powerful safeguard and open the doors to mortgage fraud. After all, many financial analysts have credited the wide range of abuses in the financial markets for generating the housing bust in the first place. Industries rarely get broad protection from consumer lawsuits, which make these new rules somewhat unprecedented.
But when lawmakers are forced to make difficult decisions, the results don’t always comport with what may be popular in the short term. According to Sheila C. Bair, a senior adviser to the Pew Charitable Trusts, “A lot of bad things are done in the name of expanding access to credit, as we found out.”
The new rules are coming in part due to the Dodd-Frank Act, which instituted sweeping reform on the financial markets and was signed into law by President Obama in 2010. When Congress was working with the White House to pass Dodd-Frank, their goal was to generate legislation that would help repair the financial sector and simultaneously make a second collapse less likely.
To help with the recovery efforts, one of the mandates contained in Dodd-Frank was that loans be more affordable. But banking institutions voiced concerns that they would be open to lawsuits if the mortgages did not meet the standards.
In response to those concerns, lawmakers took action to help construct a specific type of mortgage that would have legal protections for the institution issuing the loan. These loans came to be called “qualified mortgages.” Their function is to make it very difficult for consumers to bring lawsuits against the banks in the event that they end up losing their home in a mortgage foreclosure.
Banks are making a strong push on Capitol Hill to broaden the availability of “qualified mortgages” to prospective homeowners with less than perfect credit. And for obvious reasons, they also want the legal shield protecting them from lawsuits to be even stronger.
Of course, large banks are no strangers to lawsuits and numerous mortgage banks have faced an onslaught of litigation in recent months over financial practices that were in place prior to the financial collapse in 2008.
It was only this past February that the five largest mortgage banks reached a $26 billion dollar settlement with the government over mortgage foreclosure abuses.
