Changes to the Dodd Frank Act are Impacting Buyers

The Dodd Frank Act was signed into law back in 2010, but many of the changes that were implemented in January of 2014. This act has the potential to change a lot about the lending process. The idea behind the act was to prevent predatory lending and to hold lenders accountable for their loans, making them liable and subject to lawsuits, if they were not offering qualified mortgages. While this sounds like great legislation, the result is stricter lending practices that will keep many buyers out of the home buying market.

A few key pieces of the legislation that went into effect in January 2014 include the following:

The FHA loan maximum was decreased to $625,500. This is significant because borrowers who qualify for an FHA loan are only required to put down 3.5%. If borrowers do not qualify for an FHA loan they will be required to get a jumbo loan which requires at least 20% down. While some markets may not be greatly impacted by this decrease, markets with high property values like Washington DC and California, will be significantly impacted for a large number of buyers.

Rules for a Qualified Mortgage will need to meet new “Ability to Pay” rules. This includes stricter requirements around verifying income, credit, employment, and assets. The maximum for the debt to income ratio is set at 43%. This will hurt self-employed borrowers, who do not have a w-2 to prove income. It will hurt borrowers with less than perfect credit and with assets that are hard to verify and establish a value for. All these factors will impact lending.

Higher fees will arise. The new regulation has placed a cap on origination fees, where there was no cap prior to 2014. The 3% limit has generally not been met because of the competitive lending market. The other fees that may have a greater impact on mortgage costs is the increase in guarantee fees charged by Fannie Mae and Freddie Mac. These servicing fees will almost definitely be passed onto the customer. Add higher fees, with the anticipated increase in interest rates, and the costs could price millions of borrowers out of the market, or into lower priced homes.

The foreclosure process cannot be started until after 120 days from the last payment made by the borrower. This is very important to note. This will make it more difficult for the banks to foreclose on borrowers, but could be very expensive for the lender or loan servicing company.

These changes are bringing about a new lending environment. Banks have spent the last few years preparing for these changes, but most borrowers are unaware of the changes. There will certainly be a period of consumer education that will be required. The concern is that the stricter lending policies will turn more buyers away. This legislation has the potential to slow down the housing recovery.

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