January first came and went, and while a lot of people rang in the New Year with revelry —there was little hoopla over the Dodd-Frank mortgage changes that will drastically change the real estate markets this year.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. This law was largely a response to the financial crisis of 2008-2009 — a crisis that saw the largest broker-dealer in the world forced into a merger with one of the world’s largest banks. One of the world’s largest and best-known investment banking firms was forced into bankruptcy and liquidation. The Federal Reserve Bank and the U.S. Treasury massively intervened to maintain the stability of a number of institutions and, by that means, a financial system that seemed to be on the verge of collapse. The widespread perception among the public, who was footing the bill for this debacle, was that the crisis was the product of Wall Street greed run amok and of a financial regulatory system that lacked the necessary tools to deal with the crisis. Dodd-Frank is the legislative response to this perception, and it is hoped that it would avert a recurrence.
The new 2014 changes designed to tighten up lending practices can basically be summarized in three different points:
- Debt-to-income ratio cannot exceed 43%
- Points and costs cannot exceed 3%
- Banks must verify via eight different ways that a borrower can repay the debt
What this means for mortgage seekers is that the guidelines are tightening once again and that consumers will be forced to get more expensive lending because they cannot readily qualify for funding. This has the potential to bring back sub-prime loans, as well as, put additional people into rental properties.
It’s not only consumers that are affected by these changes but lending institutions, as well. Even the smallest changes can create months of work to update policies and procedures. Even though banks have known that changes are coming for a considerable amount of time, they just might not be ready to handle new customers under the guidelines. Does this mean that they might resort to not offering mortgages at all? Maybe. It’s safe to assume that the most prominent institutions are ready for these changes and can accommodate all of the guidelines. Smaller banks and lending institutions will be the most affected. It remains to be seen how exactly this will shakeout for the consumer.