On February 3rd, 2017, President Trump signed an executive order that requires the Secretary of the Treasury to review Dodd-Frank. So, what is Dodd-Frank?
The Dodd-Frank legislation was passed over six years ago and it was intended to prevent the market turmoil that ensued in 2008, from happening again. If you did a real estate deal between 2003 and 2008 you may know you could have obtained a mortgage by simply declaring how much you make and agreeing to some ambiguous rates and terms, which many didn’t understand. Lenders made money and borrowers received funding, yet it wasn’t a win-win situation as borrowers eventually defaulted and the insurance, on the sold loans, couldn’t cover lender losses, which resulted in financial catastrophe.
Currently there are a few issues that real estate investors have noticed with regards to the Dodd-Frank act. Here are just a few:
Quality, self-employed, borrowers having issues getting loans. I know quite a few business owners (real estate investors and storefront owners) who easily possess the three C’s needed for a loan, credit, capacity and collateral, however, banks of all sizes have to follow strict guidelines when proving the second, capacity (ability to repay). Not everyone gets a w2 and knowing many business owners, I can tell you K1’s don’t tell the whole story of a business owner’s ability to repay. According to President Trump, by amending these regulations quality borrowers, who otherwise are not currently receiving funding, may actually receive loans again and they may even create jobs.
Sellers are having issues seller financing. Do you own rental property? Have you been told that doing a lease-option is a terrific investment? I believe it can be, although, investors are finding it increasingly difficult to seller-finance when the tenant decides to exercise his/her option. Dodd-Frank deems anyone who offers terms in a residential loan a “mortgage loan originator” and guess what, they need to be licensed! In some cases, the seller is held to full HUD/RESPA standards (the same that mortgage brokers and banks are held to) to safeguard against seller/lender liability. There are seller-financing exceptions where you can seller-finance your own home, but again, there are restrictions on your interest rates, balloon payments and you may still be legally required to vet the borrower’s ability to repay if you seller-finance more than one of your properties in any twelve-month period.
Were loans easier to get locally before? If you received a loan recently it was most likely with one of the big four banks, JPMorgan Chase, Citigroup, Bank of America or Wells Fargo. Before 2008, we could secure financing locally, helping our local employees at local banks and credit unions, generating win-win scenarios while keeping money in our communities. Unfortunately, local banks have taken a beating with Dodd-Frank, due to extra regulatory compliance and ironically, they were probably the least to blame for the 2008 financial crisis. The big four now control a total of 45% of total bank assets and have clearly benefited from Dodd-Frank regulations. Perhaps it would be easier to get loans locally if the act was repealed or amended? Increasing our local lender’s efficiency may also give a healthy bump to our housing market.
There are plenty of other ways Dodd-Frank effects real estate investors, such as increased liability to some note-buyers. I may write about these in the future if there is sufficient demand for the knowledge.
On April 4th, 2017, President Trump told a meeting of CEOs, at the White House, “You have regulations that are horrendous – Dodd-Frank is an example of what we’re working on and we’re working on it right now…We want strong restrictions, we want strong regulations,” Trump said. “But not regulation that makes it impossible for banks to loan to people that are going to create jobs.”
Many believe (including myself) the Dodd-Frank regulations helped in the aftermath of the crisis. Who doesn’t appreciate a truly qualified mortgage (QM), a loan that has stable features and was underwritten to make sure the borrower can repay? Dodd-Frank reeled in lone wolves who brokered predatory loans to our neighbors and stopped insurance companies illegally grading ‘A’ on mortgage paper, that wasn’t worth the ink it was printed on (which stopped the sale of worthless paper to trusting investors).
Fast forward to today and it appears these compliance regulations may be a bit too stifling for some local banks and borrowers who truly want to make good business. We can’t go back to the wild west mortgage approvals we saw, pre-2008, but there must be a compromise that can increase lender efficiency and approve more loans to qualified borrowers. I don’t know what’s going to happen but I do know President Trump has a huge hill to climb if he wants to amend this legislation. The Republicans only have 52 seats in the Senate (60 votes are needed to send it to the President’s desk) and there are politicians and businesses that are comfortable with the status quo.
Here for you in success.