Half of defaults could have been prevented by QM rule

by Ryan Smith04 Dec 2013
Almost half of the mortgage defaults triggered by the housing crisis could have been prevented if upcoming consumer protection rules had been in effect at the time, according to a new study.

According to an analysis by Goldman Sachs, the Consumer Financial Protection Bureau’s “qualified mortgage” rule – which is scheduled to take effect in January – might have prevented up to 47% of foreclosures on loans made between 2005 and 2007, the Wall Street Journal reported Monday. But there’s a downside; had the rule been in effect then, about 25% of loans that didn’t default might never have been made.

Under the qualified mortgage rule, mortgage lenders face greater legal liability if they make loans without ensuring borrowers’ ability to repay. Mortgage lenders who originate “qualified mortgages” enjoy greater legal protections should those mortgages default.

The Goldman Sachs analysis studied mortgages made during the run-up to the financial collapse, assuming any loan that didn’t meet the QM rule wouldn’t have been made, the Journal reported. Goldman found that about 47% of mortgages originated between 2005 and 2007 that later defaulted contained at least one feature that wouldn’t have been allowed under the QM rule. In 2007 alone, 59% of loans that later defaulted didn’t meet the QM standard, the Journal reported.

On the other hand, about 25% of loans made between 2005 and 2008 that didn’t default would also have failed the QM standard, including 320% of loans made in 2007, according to the Journal.
 

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