More Dodd-Frank Housing Reform On the Way? Yikes

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Kathy Fettke


Top financial regulators say that time is running out and that Congress needs to act now, to further stabilize the housing finance system. Is that true, or have they done enough already – or perhaps too much?

Financial regulators issued many new lending and housing laws after the the housing market collapsed in 2008. To be specific, the Dodd-Frank Wall Street Reform and Consumer Protection Act has over 22,000 pages of new regulations.

Has it helped eliminate fraud and prevent another mortgage meltdown? Probably.

And one thing we know it has definitely done is eliminate smaller banks.

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According to the New York Times, the number of community banks decreased 14% between 2010 and 2014, after the passage of Dodd-Frank. Community banks are financial institutions with less than $10 billion in assets – basically the banks that are too small succeed.

The new regulations were meant to harness Wall Street banks, but understanding the complexity of rules and compliance became too expensive for small banks. Unfortunately, it’s the small banks who were more careful in their lending practices in the 2000’s, and now they’re being punished this decade, and worse – swallowed up by the big banks who caused the problems in the first place.

Bank regulations didn’t start with Dodd-Frank. Between 1997 and 2008, banking regulations had already increased by 18 percent. Those new rules certainly didn’t help to prevent reckless lending by the banks that are too big to fail.

But now top U.S. financial regulators say we need to push ahead with more housing finance reform. Members of the Financial Stability Oversight Council said in their 2016 annual report that, “housing finance legislation is needed to create a more sustainable system.”

The FSOC report shows that regulators have made progress in reforming the housing finance system with changes to mortgage regulations. It also say that government-sponsored entities Fannie Mae and Freddie Mac have also reduced their “retained portfolios” by more than 50% of the 2008 levels.

Retained portfolios consist of mortgages that Fannie and Freddie own outright and are a big source of earnings for the two entities. But as a result of the housing crisis, they were placed into conservatorship and are under a mandate to reduce their retained portfolios and their vulnerability to major losses in the event of another housing collapse.

The mandate specified that Fannie and Freddie must reduce the size of their retained portfolios by 15% per year until they reach $250 billion by 2018. The FHFA reports that Fannie Mae’s total mortgage-related investment portfolio was $413.3 billion as of December 31, 2014 and that Freddie Mac’s portfolio was $408.4 billion.

Congress gave the Federal Housing Finance Administration the power to put the GSE’s into conservatorship back in September of 2008. According to the FHFA, the role of conservator, is to take any action “necessary to put the regulated entity in a sound and solvent condition” and “to carry on the business of the regulated entity and preserve and conserve the assets of property” of that entity.

In regards to Fannie and Freddie, the FHFA’s three main goals, as stated in the agency’s 2014 Strategic Plan, are:

• To maintain foreclosure prevention activities and credit availability for new and refinanced mortgages,

• To reduce taxpayer risk through the increasing role of private capital in the mortgage market, and

• To build a new single-family securitization infrastructure for use by Fannie and Freddie. That structure would also need to be accessible to other financial institutions in the secondary mortgage market, in the future.

What do people in the business think of this?

According to the National Association of Home Builders, “The 30-year fixed-rate mortgage needs to remain the foundation of housing finance.”

In a report on the topic of housing finance reform, the NAHB says it supports the creation of a new secondary market system for conventional loans. They would have a government backstop for catastrophic circumstances. That could include the restructuring of Fannie and Freddie.

The NAHB also believes in the need for a carefully regulated fully private mortgage-based securities system. It says all participants need to have a stake in the performances of mortgages that are originated and sold.

It believes that government housing agencies should continue their roles in the housing market. That includes the Department of Housing and Urban Development, the Federal Housing Administration, the Department of Veterans Affairs, the Department of Agriculture and Ginnie Mae.

The association says state and regional resources also need to increase the availability of programs and funding for housing and homeownership. This could take place in partnership with federal or private housing capital providers.

Lastly, the NAHB says that flaws that contributed to the Great Recession need to be corrected, but that excessive and unnecessary precautions for current credit availability need to be reworked.

It says quote, “Today’s mortgage market is more stringently regulated than in the time leading up to the financial crisis. A new mortgage lending framework has been established to prevent excessive risk taking which led to the severe and prolonged housing crisis, and ensure the safe and sound operation of the entire housing finance system. However, the pendulum has swung too far and home buyers are currently confronting challenging credit conditions, in many cases beyond what should be needed to ensure safety and soundness in mortgage products and underwriting. The negative consequences of today’s tight lending conditions must be addressed.”

The NAHB says the “one size fits all” standard doesn’t work in today’s world. If you want to read more about their policy statement, you’ll find a link on our website.

What’s in store for housing finance reform?

According to the National Mortgage News, Presumptive Democratic Presidential Candidate Hillary Clinton, will likely want to merge Fannie Mae and Freddie Mac into a single government organization. The website says it probably would not be at the very top of her agenda, but that she’d likely tackle it within 18 months, if she wins the White House.

In an article by HousingWire, Clinton has a $25 billion dollar plan to increase U.S. homeownership. That plan has four critical factors.

She wants to create a program that will help hard-working families save up enough money for a down payment. That program would provide up to $10,000 in matching funds for people in underserved communities. To qualify, prospective homeowners would need to earn less than the area median income.

That’s ridiculous. Why should one family get down payment assistance while another doesn’t? If you can’t make a 3% down payment on your home purchase, you can’t afford to own a home. Period.

She also wants to provide counseling programs for borrowers to help educate them on their financial responsibilities and to help them succeed as homeowners.

The other two goals are geared to financial institutions.

Those include updated underwriting tools to better access someone’s credit risk, according to a job market that’s become much more dynamic. By using different assessment criteria for credit-worthiness, more borrowers could become eligible for loans.

This makes a lot of sense. One very important item that is not listed on a credit report is rental payments. If someone has a strong rental history, this should be heavily weighted when applying for a mortgage, but it doesn’t show up at all on the current FICO credit reporting system.

The fourth factor is for government agencies that support mortgage lending to publicize clear rules on their lending requirements. That will make it easier for lending institutions to know what’s allowed and what’s not.

Her plan also includes incentives to build new affordable rental housing especially in low-income areas. Her campaign says she would defend the current quantity of “Low Income Housing Tax Credits” and push for more in communities that need them.

This is a BAD idea and never works. Remember the projects? While some people really do need vouchers for housing, most section 8 folks appear to be fully capable of working. And some of those vouchers are high. If someone wants affordable housing, they should move to Detroit. ?

She would also encourage local municipalities to make changes to land use strategies to make it easier to build affordable rental housing.

Here we go! Clinton got this one right… Let’s remove regulations that make it impossible for the private sector to provide affordable housing.

It’s not clear what her Republican rival Donald Trump would do as President. He has several policy statements on his website but housing finance reform is not one of them. It should be interesting to see what he comes up with.

Headshot of RealWealth Co-founder Kathy Fettke. smiling.
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