Chris Dodd and Barney Frank have long since retired, but the namesake legislation they crafted four years ago is about to unleash sweeping changes in the mortgage and real estate markets.
According to real estate attorney Shari Olefson, who also wrote the book Financial Fresh Start, the changes took effect January 1st and few people even know about them.
“It’s not a bad idea to have less risky loans,” she says in the attached video. “The problem is folks are just not really ready for this. Banks have been preparing for this for a while, but folks on the street are just not aware of it.”
What she’s talking about is the coming dawn of the qualified or ‘’safe harbor’’ mortgage era.
“Here’s the problem. In order for banks to benefit from a ‘safe harbor’ against lawsuits by borrowers, the loans they issue now under Dodd Frank have to be considered qualified mortgages,” Olefson says.
Specifically, she says that means debt-to-income ratio cannot exceed 43%, points and costs cannot exceed 3% and banks must independently verify that a borrower “has the ability to repay” via eight different criteria.
While the all sounds logical and well intentioned, Olefson foresees some problems.
“Here’s the catch, about 20% of people who have mortgages right now, will not be able to get qualified mortgages. So what’s going to happen to those people is they’re going to have to go elsewhere for the new mortgage loans, or banks will have to price them more expensively because they don’t have these protections against lawsuits.”
What that means, she says, is that “it’s starting to sound like we may be seeing what used to be sub-prime loans again,” as well as the reality that more people will be pushed into the rental market.
Again, while this may be news to Mom and Pop, institutional money has been pouring into residential, single-family homes for years, and Wall Street is now poised to collect rent-checks until the real estate market rebounds enough for a suitable return on investment. As she frames it, private industry is stepping in exactly as Uncle Sam is easing out of the mortgage business.
Olefson also points out that all of this comes at a time when homeownership levels are already falling, from a peak of 69% to just 63% today. It’s a trend she fears could carry huge societal ramifications given the fact that 75% of American wealth has historically come from home ownership, or as she calls it, “essentially a forced savings account.”
Mess with that safety net, and it’s easy to see why she says the ripple effects of unintended consequences could easily outweigh the benefits of a four year old law.