The Dodd-Frank Well Street Reform and Consumer Protection Act—better known as simply “Dodd-Frank”—is a staggeringly large piece of legislation. The bill, signed into law in July 2010 in an attempt to prevent a repeat of the disastrous 2007-2008 financial crisis, spans more than 2,300 pages, and has inspired an additional 22,000 pages of regulations since its passage.
While the intent of the bill was laudable, legislation as complex and sprawling as Dodd-Frank often creates its own problems. While it’s easy to suggest that President Trump’s interest in repealing Dodd-Frank is personally and politically motivated, there are a number of very real reasons why the bill deserves, at the very least, to be significantly amended.
Dodd-Frank had a number of unforeseen consequences that could cause another recession.
One of the biggest widely felt consequences of Dodd-Frank was that a significant portion of the American population suddenly found itself unable to borrow money. Under Dodd-Frank, banks have to essentially prove that a borrower will be able to pay off their mortgage. This is known as the “ability to repay” rule. In particular, lenders are required to consider factors affecting their financial stability.
This means that those who are self-employed or who have recently changed jobs—and the nature of today’s job market guarantees that many people fall into this second category—are unlikely to qualify for a mortgage. As a result, a large part of the American population has no way of purchasing a home, giving increased buying power to flippers and others who buy homes en masse.
Another issue impacting would-be homebuyers is that the time it takes to finalize a loan from a bank has exploded since Dodd-Frank. Previously, a typical transaction took about 30 days. Now, the norm is about 60-90 days. Many hopeful homebuyers find themselves shut out by buyers who have cash in hand, and thus can close a sale in days instead of months.
Lastly, in some respects Dodd-Frank doubled down on the “too big to fail” issue that led to the recession in the first place. In particular, compliance requirements instituted by Dodd-Frank have reduced the number of mortgage lenders in the United States to just over a dozen, while hundreds of community banks across the country are shut out of the mortgage market, because they simply don’t have the deep pockets necessary to satisfy Dodd-Frank.
This means that, once again, we have a small pool of lenders that the entire country is reliant upon to keep residential real estate market moving. What could possibly go wrong?
These compliance rules affect even equity-based lenders like ourselves. The biggest issue is that purchasing a home for the purpose of owner occupancy means that the home itself isn’t available as a source of repayment funds down the road. Even if a homebuyer who wants to purchase a home for his family comes to us with a 50% down payment, we still can’t make the loan, even though we would love to. On the other hand, a renovator who will be flipping properties within a year of purchase can qualify for a loan with us, as they have the financial stability necessary to satisfy Dodd-Frank.
What to expect if Dodd-Frank is repealed.
When or if Dodd-Frank is repealed—or if it’s revised to address the above shortcomings—the real estate market will open up a great deal. Those who have been frustrated by the difficulty of purchasing their own home in impacted real estate markets—like her in Sacramento—will have the ability to get loans, and get them quickly, and thus be able to compete more readily with cash-in-hand buyers.
As always, here at Socotra we will be keeping a very close eye on the market, and will adjust accordingly to the changing nature of the market. If the opportunity arises, we will be ready to rapidly develop a vehicle for leveraging this new market, creating exciting new opportunities for investors and borrowers alike.