The Perfect Storm

In January of 2014 provisions of Dodd-Frank will go into effect that define the “Quality Mortgage”. These provisions, many of which are still in the process of interpretation by the industry, will further tighten up lending guidelines and reduce the number of buyers that will qualify to purchase a home.

No one will argue that the lending industry has a fiduciary responsibility to prevent unqualified borrowers from being able to purchase beyond their means and ability to repay. New regulations have already tightened lending guidelines and brought about significant changes. Many of the people that caused the mortgage meltdown have left the industry. Those that are left, understand the need to avoid a reoccurrence.

Long before the mortgage meltdown, the Federal Government created several Equal Opportunity laws to protect against discriminatory lending practices. These laws shelter protected classes and closely monitor lending patterns to make sure that redlining does not occur. Redlining is generally defined as the practice of lending on a selective basis avoiding specific neighborhoods. Lenders are required to complete HMDA reports that are analyzed to determine lending patterns.

In the creation of the Quality Mortgage provision of Dodd-Frank, there apparently was little, if any, consideration of the socio-economic impact of those regulations. Without reflection or review of the characteristics of borrowers that fall on either side of the line of qualified and unqualified, the law may very well have created the unintended consequence of moving clients in protected classes, to the unqualified side of the line.

Anyone with experience in the mortgage business can list clients they have worked with that demonstrated an ability to repay but likely would no longer be able to obtain financing once the new regulations go into effect in January. Many of these buyers purchased in neighborhoods where the sales price was more reasonable. The effect was to create viable communities, of similar people, that took pride in their homeownership.

Under the new regulations, will these same communities become investor havens? Without the pride of ownership, will these communities become a blight with the associated problems for local government? Will workforce or blue collar employees (teachers, policemen, firemen, nurses, construction, etc.) be able to live in the communities where they work?

Where there is a need, often new financing options appear and that may yet be the case in this situation. But the sad reality is, that no one has evaluated the potential impact or effect of these regulations and that is very disturbing. The quality mortgage rules that go into effect in January are going to put lenders into a box that may make it impossible to comply with Equal Opportunity laws and redlining prohibitions. I could be wrong, but to my knowledge, there is no one with enough hard data to be able to prove that statement incorrect

A perfect storm is brewing in the lending industry. It’s predictable. The potential damage is predictable. No one is preparing. The clouds are on the horizon and closing fast.

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