So the other day I read an article talking about more new lending rules getting set to be put into place. For those who want some background information, please refer to a previous post about the Dodd Frank Act and hard money lending.
The bottom line with regards to the new rules going into place is that there is going to be a cap on the maximum allowable debt to income ratio. This cap is going to be set at 43%, making the new rules more stringent than they have been in the past. Couple this with rising interest rates and it makes one question whether this housing recovery is going to be strangled by the relentless regulation of the credit markets.
With less borrowers being able to qualify for conventional mortgages, will this lead to an uptick in hard money loans being made? For the average home buyer it does not seem likely. Hard money lending requires much larger down payments than bank financing does. In addition, the rates are higher and for consumer residential lending the rules are in place for hard money lenders as well. With higher rates, borrowers who could not qualify at a bank due to high debt to income ratios are not going to qualify for hard money loans.
So the question here is not whether or not these tighter rules will lead to more hard money loans being made, but rather will the new rules lead to a second dip in the housing market. So far this recovery has been driven in large part by investors. As interest rates rise (and they will) and more and more regulations continue to creep into the mortgage lending industry (the Dodd Frank Act is still not fully written!) it will be interesting to see what the impact is on the broader housing market.
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