Reform May Roil Housing Market

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DODD-FRANK: Some fear tougher rules will crimp both mortgages and sales

Southwest Florida's bustling real estate industry is bracing for mortgage reform that could dramatically tighten lending standards for homebuyers.

Under the most dire scenario spun by the American Bankers Association, the looming "Qualified Mortgage" rules of the Dodd- Frank Act could push interest rates higher by one to four percentage points and trim by half the number of mortgages being issued.

That could have a major impact on the housing recovery, and thus on the broader economy, the trade group says.

The sweeping Dodd-Frank came in response to the financial meltdown that pushed the nation into recession five years ago. That was a time when banks were doling out overvalued mortgages to borrowers who lacked the means to repay the debts.

Consumer advocates argue that the changes are long overdue, and they do not foresee the same potential impacts on the economy.

What is undeniable about the new rules, slated to take effect in January, is that they will add to the time, documentation and scrutiny of loans through a system that some economists already consider overly stringent.

"Mortgage borrowers are going to get whacked in a really big way," said Joe Adamaitis, president of the Gulf Coast Mortgage Bankers Association. "Some loans needed to be refined in our industry, no question. But because of this 36-month blip, when a bunch of crooked people on Wall Street went off the charts, now everybody is going to pay."

He added, "This will turn the industry upside down."

The reform requires a stricter debt-to-income ratio for mortgage seekers, changes the way banks can sell their loans, and limits the amount of profits lenders can reap from a deal.

It also allows borrowers who slip into default to sue their bank if the underwriter did not follow the new guidelines.

Some worry banks may stop writing loans to potential homebuyers who have even the smallest blemish in their credit history.

The strict lending standards that have been followed in the wake of the recession already are considered one of the primary factors keeping a lid on home sales, which are at their healthiest in six years.

"We already have tight credit and financing requirements for qualified borrowers who just can't get mortgages," said Walter Molony, spokesman for the National Association of Realtors. "We have to get this pendulum to swing back to the middle so more small builders and homebuyers can get loans."

Within their means

The 804-page regulation was crafted to ensure that residential borrowers only obtain loans that they can afford -- protecting the economy from another foreclosure crisis.

When it was first proposed in 2010, most industry watchers conceded that some type of reform made sense.

The economy was still struggling to rebound from the financial crisis and meltdown on Wall Street. The Occupy movement was gaining momentum -- and drawing headlines -- across the country.

"We need new mortgage rules to protect the public -- we need certainty," said Edmund Mierzwinski, a consumer program director for U.S. PIRG, a Washington-based advocacy group.

"Our economy collapsed because the mortgage system was rigged against homeowners," he said. "Banks were making massive profits by deceiving people to take on loans they didn't qualify for. The industry was playing fast and loose, and a lot parts of the country, including Florida, were really hit hard."

Supporters say the new reform directly cleans up reckless lending patterns that battered homeowners and neighborhoods across the country.

Backers of the new mortgage laws say they expect the changes will have little negative impact on the housing market, with some expectations that Dodd-Frank could actually improve the economy by thinning the flow of new foreclosures into the courts.

"These are really common-sense rules of the road -- making sure everything is fully documented and that there won't be an incentive to make loans with risky product features," said Carrie Johnson, senior policy counsel for the Center for Responsible Lending. …