Lenders Want Legal Protection for Mortgages: Do Banks Deserve It?

According to a piece published recently in the New York Times, banks are looking toward increased protection regarding homeowners’ lawsuits. Such legal protections stem from 2010’s Dodd-Frank Act, ultimately approved to improve and encourage the housing market and give banks greater incentive to issue higher-quality loans. Banks, it appears, claim they will issue better loans once the legal protections are in place.

As far as litigation in concerned, 2012 was a tough year for lenders. While stringent standards have also impacted mortgage brokers, lenders bore the greatest brunt. The $26 billion government settlement, for instance, made banks more accountable for foreclosures and related practices, such as robo-signing and dual tracking. Goldman Sachs and J.P. Morgan Chase faced class action lawsuits from investors regarding mortgage-backed securities and the risks associated with faulty loans. In December 2012, Wells Fargo was served with a class action lawsuit from homebuyers claiming the bank approved less than three percent of loan modifications after taking on mortgages from Wachovia and other lending institutions.

But, while banks, according to the New York Times, state they will be hesitant to lend until legal protections are put in place, consumer advocates believe, because lenders essentially spurred the housing crisis in the 2000s, such safeguards are undeserved.

The loan, with legal protections, would be a “qualified mortgage.” Although possible protections regarding this mortgage would make litigation regarding foreclosure more difficult, homeowners, in two possible scenarios, would have the following recourse:

• “Safe Harbor,” or allowing the borrower to win a lawsuit once proving the mortgage was not written with the exact features.
• Proving the underwriting of the mortgage was faulty.
• In addition to this, the Times points out, borrowers have existing laws and regulations regarding loan document disclosures on their side.

Does a bank, in this current housing market, need these protections, especially as borrowers, for some conventional loans, need to meet higher standards? If you can recall, in October, Fannie Mae introduced stricter standards for lending, which included larger down payments, more tax information for self-employed borrowers, and, for loans on condominiums, a homeowner’s association questionnaire.