The Dodd-Frank Act is full of new provisions that will impact the mortgage market, says Mark Calabria, director of financial regulation studies at the Cato Institute.
One financial services law firm has estimated that Dodd-Frank will require 49 different mortgage reform rulemakings, as the reform bill left it to regulators to make most of the changes to the law.
Some of the significant provisions include changes to the "Qualified Mortgage" (QM) and "Qualified Residential Mortgage" (QRM) rules, which have impacts across the board.
- Impact on predatory lending: The Consumer Financial Protection Bureau (CFPB) issued the QM rule in January 2013, prohibiting lenders from making mortgages unless the lender makes a good faith determination that the borrower has a reasonable ability to repay such a loan. Determining "ability to pay" will be very costly for lenders, and those costs will be passed on to consumers. The law provides a safe harbor -- if lenders meet the definition of a QM, they are safeguarded from liability. QM bans mortgage features such as balloon payments and negative amortization, and limits fees to no more than 3 percent of the loan, among other things.
- Impact on mortgage availability: Because Dodd-Frank is an attempt to remove certain practices and offerings from the mortgage market, choices for borrowers will be reduced. Self-employed borrowers are likely to see the greatest reduction in mortgage availability, thanks to new Dodd-Frank documentation requirements.
- Impact on mortgage default: It does not appear that the new QM and QRM rules will have a strong impact on defaults, and any reduction could be offset by other Dodd-Frank rules regarding the foreclosure process that actually could increase defaults.
Notably, while the changes are significant, the actual features of the mortgage market that most directly led to the financial crisis are either not addressed by the new laws or have only been made worse by regulations.
Source: Mark A. Calabria, "Mortgage Reform under the Dodd-Frank Act," Cato Institute, January 27, 2014.
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