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The Lasting Impact of the Dodd-Frank Act

Those familiar with the mortgage industry are more than likely aware of the Dodd-Frank Act and the impact it can potentially have on the future of the housing sector. Whether or not they know exactly what it does, however, is another story. Even if they had an idea, upcoming changes are expected to alter it. Over the course of the next few weeks, changes to lending guidelines and mortgage servicing are expected to dominate the headlines of major media outlets. At the center of these changes is the Dodd-Frank Act, which has been in place for years as a means to protect buyers from predatory lending. However, changes set to take place in the upcoming weeks may not have the consumer’s best interests in mind.

The two big changes that go into effect next week will impact a borrower’s ability to repay their mortgage and how lenders can service their loans. On the surface, this may not appear to have a big effect on the investing world, but this could dramatically reduce the number of buyers that actively participate in the market. For one, the total debt-to-income ratio that lenders have used for years is being lowered to 43 percent. In the past, this number could reach 50 percent, as long as there were assets, income or a high credit score in place. This is now a firm number and, with increased mortgage interest rates, may eliminate potential buyers.

The second major change deals with how lenders can service the loan. In the past, a loan could be transferred from servicer to servicer at the will of the initial lender. With this change set to take place on the 10th, the lender has to be in compliance with the Dodd-Frank Act and has to be much more diligent on the types of loans they sell. While these changes appear to protect the buyer, it may actually favor lenders.

Buyers will go through a much more rigorous check of credit and assets. In addition, they will have to pass an “ability to repay” test to acquire a mortgage. While interest rates have remained low for years, it has been predicted that they will rise in 2014 with most other interest rates. The buyer pool, which has been on the decline, will shrink even further as many buyers who could come up with 5% down may not be able to get under the 43% debt-to-income ratio threshold. This may simultaneously reduce buyers and purchase prices.

Because lenders will be held to a higher standard on the loans they underwrite, every line of the application and piece of paperwork submitted will be scrutinized. This alone will lead to longer loan turnaround times and an increased difficulty in loan approval. If a lender is on the hook for any loan that defaults or is forced to hold them in their own portfolio, you can believe they will make sure that every “i” is dotted and “t” is crossed.

These changes will protect buyers in the long term, but lenders and loan servicers will be the ones that will really benefit by having loans they are confident will produce. Just how much this impacts the real estate market remains to be seen, but we can expect to hear from many disgruntled buyers in the coming months.

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