Financial Reform Act's Potential Affect On Credit Underwriting

The Dodd Frank Financial Reform Bill that passed in July carries a provision that lenders originating and selling loans into the secondary securities market retain ownership of 5% of their loans classified as non-qualified loans.  Mr. Dodd and Mr. Frank reason that if lenders keep a little of their own money in these loans, they are more likely to manage the underlying risk in the underwriting process.

The bill exempts certain loans called qualified residential mortgages from this requirement.  Now regulators are trying to define what defines a qualified mortgage.  New rules defining these loans must be completed by April of 2011.

Why is this important to the real estate community and the public?

“The potential impact on the availability of credit can’t be overestimated,” Mortgage Bankers Association President John Courson said in a letter to Federal regulators.

Lenders are less likely to make certain loans that fall outside the definition of a qualified mortgage and if they do, the cost of these loans to consumers will be higher because of the risk retained by the originating lender.

So what defines a qualified mortgage?  No one seems to know the answer yet which is why the government, mortgage, and the securities industries are all trying to push their definition.
  
It’s generally agreed that loans requiring repayment penalties, balloon payments, negative amortization, and low doc loans are riskier loans and would not be included as a qualified mortgage.

The disagreement is in other areas.  Should adjustable rate loans, loans whose mortgage debt ratio or total debt ratio exceed 28% and 36%, or loans with less than 20% down be considered a high risk loan?

Remember, the discussion going on now will directly impact the availability of mortgage products, their pricing (rates and lender fees), and underwriting criteria.  Mortgage companies don't want to have a 5% exposure to their loan originations.

Hopefully NAR, TAR, and HAR are making the realtor®’s voice heard in Washington D.C.  If not, we may see more legislation similar to the HVCC (home valuation code of conduct).  I haven't found anyone who likes the results of HVCC legislation other than the appraisal management companies that have benefited financially.

It's ironic that Barney Frank, Chris Dodd, and other members of our legislature benefited from what they are now calling non-qualified high risk loans, ie. friends of Mazillo (former CEO of Countrywide) loans which include low doc loans. 

If you like HVCC, you're really going to appreciate the Frank/Dodd Financial Reform Act.

Speak up and let your representatives know about your concern over the possible negative impact on mortgage credit.