The Efficacy of the Dodd-Frank Act
[with Regard to the Regulation of Mortgage Origination.]
The following guest post was written by Dave Hershman, a leading author in the industry with seven books written and hundreds of articles published
Perhaps the most famous of all mortgage laws that emanated from the financial crisis, the Dodd Frank Act, among other things was put in place to protect the mortgage consumer and restore confidence in the secondary markets so that the availability of mortgages would continue in a safe and sustainable fashion. So the question is—how has the Act performed in this regard?
If I would have one word to describe the efficacy of the Act in fulfilling its mission, I would say, “incomplete.” Certainly, the Dodd-Frank Act has not had as great an affect as other laws and regulations issued in response to the financial crisis, including…
- The SAFE Act which finally provided licensing and registration requirements for our originations industry. Though the effectiveness of the SAFE Act has been mitigated since more than half of the industry (employees of Federally Regulated Financial Institutions) have been exempt from the licensing and educational requirements.
- Loan Officer Compensation Guidelines issued by the Federal Reserve were introduced before the Dodd-Frank Act was implemented. These guidelines eliminated the practice of pricing up loans to receive greater compensation as well as price cutting connected with lower compensation.
- The HARP Program which has helprd literally millions refinance their conforming mortgages even though they may have been underwater.
In the long run, perhaps the most important aspect of Dodd-Frank was the creation of one agency to regulate the mortgage industry, the Consumer Finance Protection Bureau. The aforementioned regulations and laws now come under the purview of the CFPB and because of that, even though the Act did not necessarily introduce these concepts, the CFPB affects the implementation of them. For example, the CFPB is currently addressing the “bifurcated” licensing requirements of the SAFE Act.
Certainly with so many agencies regulating the agency without a lead body, this in the long run will be an improvement over having the many headed monster of the Fed, HUD, FHFA, FTC and more without any leadership and oftentimes lack of coordination.
Do not get me wrong. There is plenty of substance regarding the origination of mortgages within the Dodd-Frank Act—from the regulation of high-cost mortgages to the introduction of the concepts of qualified mortgages and qualified residential mortgages. These are directly related to the protection of the consumer and instilling confidence back to the secondary markets. This is here where the grade “incomplete” is applied. Why is that?
The ability to repay requirements attached to the qualified mortgage rules were ill-timed from an impact standpoint. The free markets took care of unsafe mortgages before the QM rules were issued. This happened during the financial crisis because the underlying assets that mortgages were secured against — real estate — were unsafe. The financial crisis may never have happened if the value of real estate did not collapse, though one could definitely argue that this was a disaster waiting to happen as the asset could not keep going up in value in perpetuity. Because the price of real estate was going down, lenders became overly careful with regard to lending against real estate without any regulatory guidance.
And they kept these tough guidelines in place long after they were needed from an asset standpoint because the lenders were so busy refinancing loans through HARP and FHA at record low rates that they could not afford to encourage more volume. Lenders have loosened their guidelines this year, not because of the implementation of the qualified mortgage regulations, but because their volume is down. Even the government (FHA and FHFA in particular) are encouraging lenders to loosen up.
Keep in mind that agency approved loans are “sort of” exempt from QM requirements for some time and since the agencies still dominate originations, non-QM lending provides niche lending at most. I say “sort of” because the agencies have issued their own QM guidelines, but in reality they have not had to move their guidelines much at all to meet their own new standards in this regard.
The qualified residential mortgage regulations have not yet been finalized and it looks as though these rules will align with the QM rules and therefore, again, the affect will be mitigated. So the real question is will the QM and QRM affect lending in the future?
The real test will be when the real estate asset is re-established for the long term and a more normal market ensues. Will the Dodd-Frank guidelines cause lenders to be more conservative than the market calls for in the future? The secondary markets also have not been restored to a sense of normalcy but again I will hypothesize that the stabilization of the real estate asset as well as sensible lending will do more to encourage these markets as opposed to the QRM standards. The concept of making lenders accountable has already happened witnessed by the many lawsuits and government settlements which have occurred.
Incomplete for now, but in the future, as the CFPB evolves and so does the credit cycle and secondary markets – we may see the true effect of the Dodd-Frank Act.