What The End Of Dodd-Frank Means For Real Estate
Will the end of Dodd-Frank regulation lead to another real estate collapse?
The wolves of Wall Street are getting ready to run wild again. Donald Trump has just rolled back the Dodd-Frank regulation, brought in to curb lending practices which led to the 2008 real estate collapse. The Dow Jones is already up and bankers are licking their chops in anticipation of the roaster ride ahead. But what does it all really mean for real estate? Well, quite a lot.
Without gazing into a crystal ball and predicting that the same free for all that led to the implosion nine years ago will happen again, it’s worth taking a look at what effect the Dodd-Frank rule actually had. The Big Short will give you a refresher on how crazy things got. Here are a few nuggets.
Liar or stated loans—a borrower could completely fabricate information about their income and be approved to buy a home along with a baseline credit score of 620.
Option ARM Payment—if a homeowner felt like not paying their mortgage one month or, at least, not all of it, they could get the difference tacked onto their principle.
HELOC’s (Home Equity Line Of Credit)—Banks were letting owners borrow against their primary residence as property values kept soaring. Buyers, drunk on easy cash, were going on vacations, buying cars and other investment properties. Then many investors figured out that they could also borrow against their investment properties, or at least refinance it and pull cash out and so the gravy train kept rolling.
When the inevitable collapse came, suddenly and violently, like the death of disco in 1979, Dodd-Frank rewrote the lending rules in 2010 and things went into reverse thrust. Getting a loan for many home buyers was like trying to hear Bee Gees record on the radio in 1980.
“For lenders this is all about paperwork, verification and doing a lot of the grunt work that was ignored or passed over before the crisis,” Jaret Seiberg, a managing director at financing firm Guggenheim Securities told CNBC. That meant sky-high credit scores, knee deep tax returns, and job verification phone calls to your boss.
Wiping away the Dodd-Frank rule could and probably will loosen such regulations but will it mean a return freestyle lending? Possibly.
“We have the best, most highly capitalized banks in the world, and we should use that to our competitive advantage,” National Economic Council Director Gary Cohn told the Wall Street Journal. “But on the flip side, we also have the most highly regulated, overburdened banks in the world,” he added.
Rolling back Dodd-Frank will undoubtedly be met with fireworks and champagne by people in the business of selling houses—real estate and mortgage brokers especially. They are not particularly concerned what happens to buyers once they buy their home, only that it closes and they make their commission. Indeed, a lot of people made a lot of money prior to the 2008 collapse, the problem was that many didn’t know when to get out. For those who have learned their lesson, the good times may be about to roll again.
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