By Peter Ricci
Does Dodd-Frank effectively curtail risk, or does it go too far in its aims?
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a sweeping piece of legislation, a 2,300-page document that attempts to encompass nearly every facet of the financial sector. Originally passed in the summer of 2010, Dodd-Frank is so massive that, 16 months after its passage, many of its key tenets are just now seeing the light of day. To get a better handle on the bill and its implications for real estate in 2012, we spoke with two knowledgeable agents about the bill’s good and bad aspects and what they indicate for real estate going forward.
The Good
Mabel Guzman, a sales and REO agent with @properties and a former president of the Chicago Association of Realtors, sees two main positive qualities of Dodd-Frank, both of which deal with protecting homebuyers. The first is an endowment of $1 billion in foreclosure prevention funds to the Department of Housing and Urban Development. With the latest data from RealtyTrac placing 7,321 foreclosed properties in Cook County alone (or, 1 out of every 299 homes), Guzman said the funds represent a true commitment from the government to address one of the key issues facing housing today.
The second is a series of amendments to the Truth in Lending Act that would force lenders to be absolutely transparent about any additional costs homebuyers may face when closing on a home. “I’ve been in the business (for) 14 years, and I’ve found closings … where the buyer is sitting there, (saying) I need to come up with how much more money? Another $100? Another $2,000?” Guzman said. “In some cases up to $5,000 dollars.”
The Bad
Zeke Morris, a team leader at Keller Williams Realty, said he feels that Congress went too far with some of the bill’s characteristics and passed legislation that tried to accomplish too much in too short a time. One example, which has undoubtedly garnered the most attention of all the housing-related measures in Dodd-Frank, is the Qualified Residential Mortgage (QRM), a pending rule that would require 20 percent down payments on private loans; though FHA and GSE loans would be exempt – as long as the GSEs remained under receivership – any loan that did not meet the 20 percent requirement would be deemed a riskier loan, and originators would be forced to retain 5 percent in capital on the loan. “I understand where Congress was headed,” Morris said. “I just think that they probably went a little overboard in terms of trying to be far-reaching, in terms of all the things that they are trying to do through one bill.”
Guzman also saw QRM as one of the more troubling aspects of Dodd-Frank, as the “broad brush” measure, in her mind, would only restrict lending from perfectly valid, middle class homebuyers, rather than making lending safer. For instance, Guzman said that for a family living on $75,000 a year, it could take 14 years for that family to save enough money for a 20 percent down payment on a $172,000 home. QRM, Guzman said, incorrectly diagnoses down payments as the principal reason for foreclosures, especially when job loss and other economic factors weigh even more heavily on such predicaments. Furthermore, there is no exact date for when QRM will be implemented. The Consumer Financial Protection Bureau has not yet defined the specific lending standards for the policy, due in large part to a February Supreme Court case, Magner v. Gallagher, that could have far-reaching effects on how lenders approaching fair lending standards and how “quality mortgages” are defined. This air of uncertainty, Guzman said, only adds to Realtor anxiety on the measure.
Going Forward
In the end, though, both Guzman and Morris admit that it is difficult to assess what impacts QRM, Truth in Lending or any other provision of Dodd-Frank will have in 2012, because the legislation remains a “moving target,” as Guzman described it, a piece of legislation that constantly morphs and changes shape as its reforms are implemented. And while Morris said he plans on working with the bill’s various changes as they materialize and educating his clients on their implications, Guzman said she is optimistic about the chances of a “cooperative effort,” as she called it, composed of builders, Realtors and other housing groups, to lobby Congress and change QRM and other unsavory features of the bill. “2012 is a year of collaboration,” she said.
When Mr Frank and Mr. Dobbs members of the Finance committee, back in the Clinton administration, frank came up with the quote, ” the people deserve a home whether they can afford it or not”. This may not be axact, but the meaning is the same as intended. From this idea, Mr Frank and his committe members saw an idea to not only sell their constituents on homeownership, but the real reson was that the formatiuon of subprime loans should be expanded greatly and incorporated into FHA. Frank no doubt reasoned that the subprime loans were very similar to FHA backed mortgages which reqired 3.5% down payment, and verification of income and funds to close. Frank reasoned that the qualifications of no income verification and no proof of funds was similar to the FHA requiredments.
Andrew Cuomo, Sec of HUD refused to allow srbprime loans to be accepted by FHA. After a great amount of urging from the committee, Cuomo grudgingly allowed the subprime loans to be purchaed and securitized by FNMA and FHMC. Within less than 8 years, the mortgage meltdown turned into a recession, with pensions funds, banks, retirees, and most other financal institutions seeing the FNMA and FJMC mortgage backed securities loose value, by up to 50% or more, due to the fact that the subprime loans were included in the securities that were sold as “A” credit securities. These were also graded by that large bond houses. Trillions of dollars chaged hands, and Wall street made a fortune packaaging and repackaging these loans. Mr Frank and Mr Dobb received huge campaign contibutions from the institutions that made fortunes from these tainted mortgage backed securities.
Frank and Dood were the most instrumental members of Congress who caused the mortgage crisis, which really lead to a recession. Now we let them present a bill to fix the disater they created! Now we find out that in their bill, there is so much ambiguity, that the courts are going to have to define this bill and its ramifications on the banking system, and how it will affect the American people. I’m sure the finance committee and other members of Congress who voted for this ambigious bill received large contributions to help further feather their retirement nests.
This all started with Phil Gramm (R) Texas repealing the Glass Stegal Act from the Depression era.
“Foreclosure” Phil did this with (3) fellow Republicans.
Clinton signed it after Robert Rubin and other (D) leaders wanted this act repealed to push homeownership; but in fact all it did was enrich their banking buddies by letting them package a bunch of garbage loans into CDO’s etc.
Bush 43 did the same thing by pushing homeownership to all minorities; especially Mexicans, during his (8) years post 9.11. Only McCain stood up to declare a future sh*tshow…but Karl Rove and Bush shut him up.
If it was not for Phil Gramm (R) and the repeal of Glass-Stegal…the Wall Street mess would have never happened.
It is that SIMPLE.