How To Measure Wall Street Reform

Is Wall Street reform impacting the mortgage system?

If we’re to believe the American Enterprise Institute’s International Center On Housing Risk, the answer is plainly no.

“Nearly a quarter of all home purchase loans in March had a debt-to-income ratio greater than the CFPB’s Qualified Mortgage (QM) rule limit of 43 percent,” said the AEI’s Mortgage Risk Index. “This trend continues to show the QM rule is not making a discernible impact.”

Really? No discernible impact? Has Dodd-Frank changed the way mortgages are originated and sold? Or not?

Dodd-Frank, under which we have developed the qualified mortgage rules, became law in August 2010 and since then the mortgage marketplace has changed radically.

Don’t believe it? When was the last time you saw a no-doc loan application? How about an option-ARM? You can blame Dodd-Frank and when you do congratulations, you’ve just seen an example of its impact.

Falling Foreclosure Rates
Let’s start with the most important point: Since Dodd-Frank foreclosures are disappearing. According to RealtyTrac foreclosure  activity in the fourth quarter was at its lowest level since 2007.

Low foreclosure numbers are the magic lure which draws investors into the mortgage marketplace. The more capital from investors the more-likely that mortgage rates will remain low —  and that’s a real impact.

No less important the smaller number of distressed loans we’re seeing today are largely a lagging indicator. Today’s foreclosure figures really show what’s going on with mortgages made before the passage of Dodd-Frank. For instance, in February the Mortgage Bankers Association reported that more than 90 percent of all current delinquencies stem from loans made before 2009.

“Loan cohorts from 2009 and earlier continue to make up more than 90 percent of seriously delinquent loans,” said Michael Fratantoni, the MBA’s chief economist in a written statement. “Loans originated in 2007 and earlier accounted for 75 percent of the seriously delinquent loans, while loans originated in 2008 and 2009 accounted for another 16 percent.”

The fact is that since the passage of Dodd-Frank foreclosure rates are in the dumper. According to  Lawrence Yun, chief economist with the National Association of Realtors, foreclosure rates for Fannie Mae and Freddie Mac are between .1 and .2 percent, about half of what they used to be before the mortgage meltdown — and that’s an impact.

About That 43 Percent Debt-To-Income Benchmark?
Does the Ability-to-Repay Rule demand that all mortgages must have debt-to-income requirements limited to not more than 43 percent of the borrower’s income?

The answer is no. There is no such absolute limit.

According to the Consumer Financial Protection Bureau, “the Ability-to-Repay Rule does not mandate debt-to-income ratios. The rule simply requires lenders to evaluate a borrower’s debt-to-income ratio and use their judgment about how much debt a consumer can afford to take on.

“Nor does the Ability-to-Repay  Rule require all Qualified Mortgages to meet the 43 percent debt-to-income ratio. A loan can also be a Qualified Mortgage if it meets standards for loans backed or purchased by Fannie Mae or Freddie Mac, if it’s insured by a federal housing agency, or if it is offered by a small lender that holds the loan in portfolio. Right now, roughly 92 percent of mortgages fall into one of those three categories.”

Given this reality, why is it surprising that nearly a quarter of all new loans had debt-to-income ratios greater than 43 percent? This is precisely what Dodd-Frank allows.

No less important, if nearly a quarter of all loans have a debt-to-income level greater than 43 percent then plainly such financing is widely available. The availability of loans to borrowers with high DTI ratios has not been closed down by Dodd-Frank, contrary to widespread worries and rumors.

Soaring Equity
Home values rose by $2.3 trillion in 2013 according to the Federal Reserve, one reason there are so few recent foreclosures. When home values are rising distressed borrowers have more ability to sell unaffordable homes at market values and pay off existing loans.

That’s not the whole story, though. According to Freddie Mac mortgage borrowers no longer seek to maximize debt.

“Borrowers continue to choose products that strengthen their home equity when they refinance,” says Freddie Mac. “During the first quarter of 2014, 83 percent of homeowners that refinanced either left their loan balance unchanged or paid down their balance at or before refinancing. Further, 39 percent of homeowners refinanced into a shorter term fully amortizing loan, to pay down principal and build home equity faster than on their previous loan.”

Why are borrowers today less likely to seek the biggest loans possible? Given the Dodd-Frank requirement to prove that borrowers have the ability to repay their debts, it’s a lot easier to get a loan when asking for less than when asking for the maximum.

The reality is that Dodd-Frank  and its qualified mortgage standards have totally changed the mortgage lending system, especially if we look at such measures as fewer foreclosures, greater equity and widespread loan availability. Now that’s impact.

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