Though Dodd-Frank was passed over six years ago, it has recently come into the spotlight again. With the transition of power to occur in January, there is speculation that the act may be repealed. Though it is Congress not the President that has the power to repeal or enact laws, the President has a lot of influence on legislation. Some experts, however, such as banking analyst Dick Bove, believe that the Federal Reserve not Congress is best positioned to deregulate.
What is Dodd-Frank?
Signed into federal law on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was put into place to impose additional regulations on the financial industry. The purpose of this 2,300-page regulation is to prevent the series of events that led to the 2008 financial crisis from happening again. A new regulatory body called the Financial Stability Oversight Council (“Council”) was born out of this legislation to oversee financial institutions.
How has it affected the real estate market?
During the last housing boom, almost 8 million U.S. homes fell into foreclosure. The Dodd-Frank law addressed this with a credit lockdown that still exists today even five years after the bill passed. Many people think this legislation has led to the need for larger down payments, but that idea is a misconception. What has changed for investors is the credit and ability to repay rule. The act created the Consumer Financial Protection Bureau, which has implemented new regulations in areas such as mortgage servicing, foreclosure relief services, and debt collection. The main impact is the increasing amount of time and labor required to complete real estate transactions.
The legislation has delayed the housing recovery, as lenders have not jumped in with new products at the same rate as before. According to a study by the Mortgage Bankers Association, processing of the most basic loans now takes lenders far longer than ever before. From 2005 to today, the number of loans that the average large bank underwriter can process per month has decreased from about 165 to only 33.
What happens if it is repealed?
Since the law’s implementation, big banks have only grown, with JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo now controlling 45 percent of total bank assets. Repealing the act would likely help smaller banks, for which the Dodd-Frank regulations have presented a challenging burden. This regulatory change, in turn, could increase the efficiency of lenders and make it easier for buyers to apply for loans, boosting the housing market.
Summary?
It's difficult to predict what will happen, but the current market sentiment leads one to believe that a less-regulated environment may lead to a further-improved housing market.
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