Dodd Frank begins with a vengeance January 14, 2014. The new provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act goes into effect on this date.
So what? - You ask, it was passed into law in 2010.
The so what comes in with the new provisions of the law that kick-in on January 14, 2014, and these laws will have a dramatic affect on your wallet if your planning on buying or selling real estate after that date. Now that I have your attention, let me explain why.
This law consisted of more than 2,300 pages and was so complex that the elected representative turned it over to non-elected “subject matter experts” to refine the law and build the regulations that we will have to live by going forward. Fast forward to July 23, 2013 and we are introduced to 14,000 plus pages with 155 new rules.
"Real estate agents will come under the regulations of CFPB, as well as state laws"
January 14, 2014 will introduce the buyer or seller to the “qualified residential mortgage,” or QRM, that will lessen the number of people who ultimately can obtain home loans. Most agents and brokers have no idea what QRM is or how it will impact their businesses. Briefly, QRM was designed to set the bar for residential mortgages and to minimize the risk that borrowers may default. It requires that debt ratios be limited to 43 percent and loan fees limited to 3 percent, and interest-only loans and negative amortization are not allowed in most cases. The Dodd-Frank bill also requires the lender to retain 5 percent of any mortgages they make. In other words, if they make a $100,000 loan they must retain $5,000 to secure the loan. QRM loans are exempt from the risk retention rules. This means that the lender can sell the loan on the secondary market without having to retain the 5 percent.
The effect of these provisions is already being felt in the lending industry. Citibank has restricted its lending to those areas where it has a banking presence. Compliance departments have tripled in size at many large lenders. Community banks and credit unions are being choked by the regulations and often lack the resources to meet the new compliance requirements. That means they cannot compete and if you got your last loan from a community bank or credit union you may not have that opportunity in the future.
For the first time in history, lending decisions may be made based upon compliance issues rather than just credit issues.” Here’s why: Imagine that you made a mistake on a purchase agreement. The buyer and seller want to change the agreement to correct the mistake, except the law prohibits you from doing so. If a lender makes a mistake with any part of the compliance, here’s what happens:
- The lender now has to pay all of the borrower’s closing costs.
- Even if the mortgage agent made the mistake, the mortgage agent must still be paid.
- The lender cannot deduct any costs or losses resulting from the mistake.
- The lender still has to close the loan.
These provisions will be particularly difficult for online mortgage sites such as Quicken and Zillow. In addition to the issues cited above, jumbo loans currently fall outside the QRM provisions. This creates tremendous uncertainty as to what will be required of lenders who want to sell jumbo loans on the secondary market. The result will most likely be that be even fewer jumbo loans will be available.
Basically there will be fewer loan choices as community banks and credit unions are squeezed out of the market making it even harder for many borrowers to qualify. The loan process will take longer because of the added administration processes due to the increased compliance. As a result a loan will be more expensive and someone will have to pick-up that cost – Guess who?
Lenders generally will issue loans that meet QRM criteria. There is an ulternative to the QRM but the risk is higher to the bank and few will entertain the additional risk. That means a non-QRM will be entertained by the alternative higher risk lender meaning more expense to execute the loan and higher interest rates for the bowrower.
Financial analysts from J.P. Morgan Securities have estimated that borrowers might pay up to three percentage points more for loans that are subject to risk retention (i.e., loans that don’t meet the definition of a qualified residential mortgage). So here’s the bottom line: If your on the fence about selling or buying a home it would be to your advantage to execute before the end of the year.
If you think you might be able to take advantage of seller home financing, and avoid all of this then I would suggest this will not be an option. The risk for seller home financing is incredibly high and no one that is knowledgeable is going to entertain that risk.
This will all be monitored by the new Consumer Financial Protection Bureau (CFPB) that is currently hiring for monitoring positions. Part of the new law also brings the REALTOR® under this agency for compliance making the complexity of the real estate agent even higher as they must comply with their state. and now regulations under the CFPB.
Will any of this change? Maybe, the politicians are just now discovering the ramifications of the bill.