New Housing Market Rules

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In October of 2011, new housing market legislation was passed. The Dodd-Frank act requires lenders to bear part of the risk in mortgages sold to investors. The idea was if lenders were partly responsible for investor lending, the lenders would tighten loan standards and help avoid the catastrophic number of defaults that popped up in the last few years.

A Good Idea?

The new Dodd-Frank act is a good idea in theory if you are a lender. If you are a potential home buyer or real estate investor, it makes it nearly impossible to get a mortgage. Some worry that this move may backfire and actually worsen the real estate market and economy. Lending critics, bankers, and bank lobbyists believe the new legislation the reverse of what the housing market needs in order to grow.

The new law redefines what is a responsible loan and narrows recipients to only those people with the best credit scores.  Similar terms were used in previous years for loans, but a person could still get a mortgage if they qualify by purchasing mortgage insurance.

Normally, lenders could sell defaulting loans to third parties that packaged mortgages into securities. The defaulted and foreclosed loans caused securities to tank and the push for better loan underwriting. Under the recent Dodd-Frank financial-reform act, mortgage lenders must retain a minimum of 5% of the loan risk.

The new law also redefines qualifying residential mortgages. Real estate investors and home buyers must have a 20% down payment. There should be a cap on the borrower’s debt-to-income ratio, loan term restrictions, among others.

The rule is supposed to protect everyone and insure that loan originators and securitizers share in the consequences of the failed loan.

Loans considered qualifying will be easiest to securitize, increasing banks’ liquidity and lowering their costs. Loans that fall outside the guidelines, by contrast, will be much harder to move off a bank’s books, reducing liquidity and increasing costs. Some say banks could stop underwriting non-qualifying loans altogether or would charge higher interest rates to offset their increased costs.

The numbers show that an estimated that 10% to 20% of residential mortgages would qualify under the new standards. Thus leaving the other 80-90% being thankful they got their loan beforehand.

If loans were hard to get before for real estate investing, they will only increase in complexity since the Dodd-Frank Act. For more information on real estate investments and financial matters, visit us at We are the nation’s number one home buying franchise. We have a large assortment of real estate investments as well as real estate franchise opportunities to choose from. For more information, call or visit us today.

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