A foundation or a farce ?

A foundation or a farce?

There is a lot of news coming out as of late from the Federal Reserve. The news I'm talking about isn't regarding QE2 or raising interest rates. The fed is in discussions about regulatory provisions from the Dodd-Frank Act (Link). These provisions are a beast at over 450 pages. The Wall Street Journal's Alan Zibel wraps it up pretty succinctly in this post on April 18th. Most notably, the standards for home loans – conventional and "non-standard" – are clearly fleshed out and easy to understand.

As of the writing of this post on April 19th, these are only proposals (here are the highlights). However, I think this an important step in helping to reconstruct a housing market that did its best, for the better part of the last decade, to run amok all the way over the cliff. Transitioning from a "no holds barred" mortgage origination paradigm to structured, concise guidelines will be a boon for just about everyone. Banks and lending institutions will have clear standards to abide by, mortgage backed securities (MBS) buyers will breathe a little easier, and, most importantly, the general public will be more secure in their future efforts to buy a home.

Reviewing the newly proposed rules, there are few interesting nuggets. The first is the need to "consider and verify" such basics as employment status, debt to income ratio, credit status, and "income or assets used to determinate ability to repay." The fact that this has to be spelled out in black and white is almost mind numbing. A "qualified mortgage," which has yet to have its down payment ratio defined, would not include loans with negative amortization, interest only payments, terms longer than thirty years, or balloon payments. In addition, there is a cap on fees and total points limited to 3%. Lastly, for many of those potentially damaging adjustable rate mortgages and other "nonstandard" loans, creditors have the option to refinance them into a "standard" loan if they meet that respective criteria.

With the impending end of Fannie and Freddie now in the foreseeable future, having clear and logical rules for "vanilla" mortgages and existing exotic loans will be a confidence booster for the consumer. Moreover, the ability to roll those exotic loans over into conventional loans with a fixed rate will help promote the recovery of the market.

These proposals, coupled with clear risk-retention rules (currently TBA), will provide a solid foundation for reliable housing growth and, more importantly, economic prosperity. There remains, however, one question that looms ominous in my mind: Will the banking/private lenders fight this regulation? Hopefully, after this last disaster’s destruction of billions of dollars of home value, the industry can recognize the sensibility of this proposal.

-The Inside Associate