What the Dodd-Frank Rollback Means for Housing

    Regulatory rollbacks and the housing market

    The Dodd-Frank financial regulation rollbacks, officially named the Economic Growth, Regulatory Relief and Consumer Protection Act, recently signed into law poses some significant changes for community banks and local housing markets. Let’s explore some of the biggest potential impacts the Dodd-Frank rollback will mean for housing.

     

     

     

     

    More credit for local construction

    Because the original Dodd-Frank regulations hindered community banks from making loans to smaller homebuilders, the new home construction market has suffered. The recent rollbacks make it easier for local banks to begin offering more credit to smaller construction companies.

    The National Association of Realtors (NAR) was one of the housing groups that came out in favor of the legislation prior to passage. According to NAR Chief Economist Lawrence Yun, “As the homebuilding industry has become more dominated by large corporations, now we have this relief, which means that, small-time homebuilders will have better access to capital to build homes.”

    Better access to capital could mean a significant increase in new home construction, which could in turn bring down home purchase costs overall as more housing will become available. This reduction in home purchase costs could lead to a shift from a sellers’ market to a buyers’ market for the housing industry.

    Alternative credit scores

    The legislation also requires that Fannie Mae and Freddie Mac consider the use of alternative credit scoring. This expansion could help borrowers with little or no credit acquire mortgage approval.

    While what can constitute the basis of alternative credit scoring is yet to be determined, some typical elements include utility payment history, rental payment history, and other forms of payment verification. For younger buyers or those who have traditionally dealt in cash-only transactions, this could mean an opportunity for expansion of the homeownership pool.

    Experts warn, however, that the market must remain vigilant to ensure that looser credit restrictions don’t lead to a repeat of the housing collapse of the mid-2000s. Lenders will need to remain cognizant and ensure that they do not make loans to homeowners that they cannot afford to pay back.

    Potential for lending discrimination

    Another possible downside to the rollbacks is the potential for lending discrimination. By excluding some lending institutions from including disclosure requirements laid out in the Home Mortgage Disclosure Act (HMDA), some experts have expressed concern that lack of oversight could lead to less ethical lending practices.

    HDMA requires that lenders report loan-level information that helps government agencies identify and prevent lending discrimination. While such practices can and do occur in almost any market, discriminatory lending is particularly prevalent when home prices are high and credit is tight. With reporting requirements laxed on some institutions, it could be more difficult to recognize and halt lending discrimination.

    Looser mortgage regulations

    One of the most touted and widely supported aspects of the rollback is the looser mortgage regulations on community banks and credit unions. The additional buffers against legal liability could allow lenders to issue mortgages to a wider range of borrowers.

    The new legislation widens the definition of a small bank from those with $2 billion in assets to those with $10 billion. In addition, it protects them from some legal liability when issuing mortgages, including those to borrowers who otherwise do not meet traditional borrowing requirements and those with high amounts of debt.

    Traditionally, lenders have shied away from borrowers with debt-to-income (DTI) ratios higher than 43 percent. According to the Credit Union National Association’s Chief Advocacy Officer Ryan Donovan, the new rules mean that credit unions and banks “might be able to work with a borrower to get them in a home,” even if they are not borrowers who would have qualified previously.

    Experts encourage borrowers to be cautious when applying for a mortgage, especially if their DTI is higher than 43 percent. DTI requirements help borrowers to avoid ending up with a mortgage they can’t afford, and potential buyers should do their own research before going into the mortgage process. This can help them to reasonably estimate what they can afford and what is out of their affordability range.

    Final thoughts on rollbacks

    The recent Dodd-Frank rollbacks stand to mean big changes for the housing market in 2018 and beyond. While the rollbacks may make it easier for many borrowers to secure mortgage loans, experts advice that the lax lending requirements will make it more important than ever for buyers to be educated as they enter the homebuying process.

    Are you in the market for a mortgage in the post-rollback era?  Leave us a comment below and tell us about your experience.

    EXIT Realty Bob Lamb & Associates is Murfreesboro’s most innovative real estate team.

    EXIT Realty Bob Lamb & Associates
    2630 Memorial Blvd, Murfreesboro, TN 37129

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