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The November 8 Effect

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Posted On: 07/06/2016

Question: We are now in the midst of the national election cycle. Will a new Administration dump the Dodd-Frank regulations?

Answer:

No matter who wins the presidency it’s very unlikely that the Dodd-Frank Wall Street Reform and Consumer Protection Act will be repealed.

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An end to Dodd-Frank has been widely discussed since the legislation passed in 2010. Nothing has happened. Looking ahead it’s unlikely that the legislation, also known as Wall Street Reform, will be repealed. Here’s why.

Community lenders, who have a lot of political power in Washington, favor Dodd-Frank because a return to the old standards could drive many of them out of business.

“While regulatory compliance costs driven by Dodd-Frank provisions are an ongoing and serious problem for mid-size and small lenders, none of our members would welcome a return to the pre-2008 world of poorly designed mortgage products and lax underwriting standards,” Glen Corso, executive director of the Community Mortgage Lenders of America, explained in an interview.

Back in 2003, regulators and association executives took a photo of themselves holding a chainsaw and limb trmmers under a banner that read“Cutting Red Tape.” The government promised to post new groups of regulations every six months for public comment, giving bankers and interest groups an opportunity to identify regulatory requirements they deemed unnecessary.

One result was the widespread marketing of dubious “affordability” and “nontraditional” loan products, such as option ARMs, interest-only financing, 110-percent mortgages, no-doc loans and stated-income loan applications. Some 7,000,000 foreclosures ensued during the mortgage meltdown, along with a massive recession, Wall Street bailout and more than $140 billion in legal settlements with major U.S. banks.

The 2010 Dodd-Frank legislation changed the mortgage system by creating a massive incentive for lenders. In exchange for originating low-risk “qualified mortgages” (QMs), lenders are immune from virtually all liability claims.

More than 98 percent of all new loans are now QMs and foreclosure starts are at their lowest level in 16 years. This is good for borrowers and lenders. Low foreclosure rates attract capital and more capital helps push down mortgage rates.

“Know Before You Owe” rules that went into effect in October provide greater transparency to borrowers, despite loud misgivings of the real estate industry.

While an outright repeal is unlikely, modification of Dodd-Frank is possible. For example, points and fees are now limited to 3 percent of the loan amount for qualified mortgages above $100,000. Below $100,000 lenders can charge more. If the benchmark is raised to $125,000 or $150,000 then lenders will be able to charge higher fees for more loans, a lobbyist’s dream.

Will such a “technical correction” make it through the next Congress? Stay tuned.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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