In June, the House of Representatives voted on a measure that would scale back the restrictions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. GOP leaders in the House have put forth their own bill, called the “Financial CHOICE Act”, which guts large parts of the Dodd-Frank regulations. The bill heads to the Senate next.
The Dodd-Frank Act was put in place after the housing crash of the early 00’s as a preventative measure. It barred certain practices that put consumers at risk in terms of lending and borrowing money. However, because legislation is never simple or straightforward, the act also touched on several other aspects, including seller financing and mortgage buyers.
We touched on the implications of a possible Dodd-Frank repeal, but now, as it heads to the Senate for a vote, lets look at three ways a repeal of Dodd-Frank can affect you.
1. Seller Financing is Going to Get Easier, but Less Common
When Dodd-Frank was passed, it put regulations on every part of the housing industry, including seller financing.
How much it affected you depended on how many properties you finance per year, but it still put several inconvenient complications in the way of anyone wanting to seller finance a property.
If the Senate votes to repeal Dodd-Frank, investors and mortgage buyers alike are going to see a less complicated process with more opportunity for growth.
We are also going to see a housing market that becomes much more competitive. Without the regulations of Dodd-Frank, more and more first time homebuyers are going to seize that opportunity to buy homes.
This may truly turn the market even more in favor of sellers, making seller financing an even more lucrative option, as you gain more bargaining power at the table.
However, that said, with fewer regulations on banks, it is likely we will see a slowdown in the demand for 1-4 family (owner-occupied) seller financed notes.
2. Mortgage Buyers Will Change Focus
Mortgage note buyers are typically interested in first position liens. These are the primary or first mortgages on the property and take precedence in terms of debt payoff.
Traditionally, these have been the most attractive to mortgage buyers, because in the event of debt collection, first position liens hold priority and must be paid before anything else. It’s a profit game, and holders of first position liens find themselves in a more lucrative position as compared to other types of loans.
However, a repeal of Dodd Frank would place the creation and management of first position liens back under the dominion of banks and other lenders. With fewer first position liens coming their way, mortgage buyers would begin turning their focus to junior liens, like home equity loans and second mortgages.
Sellers carrying paper on first mortgages may find their notes in higher demand in a market where they are scarce, but sellers looking to get rid of second mortgages will find a more flexible market for their notes.
3. There is Going to be a Lot of Punditry
Like with everything in the current political climate, the repeal of Dodd-Frank is controversial.
And because the media exists to sell itself, you’re unlikely to find a balanced picture of what the repeal means on network news.
Proponents see it as an easing of the free market, allowing investors to put their money where they will and maximize profit margins. They paint a picture of a bright utopia, with money flowing freely down the perfectly-mortgaged thoroughfares.
Opponents see it as placing power back with the big banks and setting America up for a repeat of the housing crisis and recession of the early 2000’s. They warn of another housing crash, another recession, and general doom for everyone involved.
So who is right? Both? Neither?
In reality, it’s hard to say just yet. For one thing, the measure hasn’t passed the Senate, and if the Senate changes anything in the bill, they will need to send it back to the House for approval. This is a slow process, though certainly one to keep an eye on.
There are several factors here, but the truth is that we are not in the early 2000’s anymore, and the quagmire of circumstances that led to the housing crash are not in place anymore.
The economy has seen fairly steady growth the last few years, and unemployment is down, in some places to as much as 3%. Also, it’s important to keep in mind that many banks collapsed under the weight of the crash, and they are likely to be wary as regulations loosen.
This doesn’t mean they will be as tight-fisted about mortgages as they have been the past few years or so, but it does mean that even as banks open up their lending practices, they will be less likely to offer the kinds of sub-prime loans that were available in the years leading up to the crash.
So don’t count your legislative eggs before they’re hatched (or signed, in this case). The Dodd-Frank repeal is still not a certain thing. Keep an eye on its progress, but don’t worry overmuch about implications just yet.
4 (Bonus). Mortgage Buyers Will Still Buy Your Notes
With first position liens returning to the realm of banks and other lenders, mortgage buyers may find themselves in a position to be more flexible about what they are willing to buy.
Dodd-Frank isn’t repealed yet, and it’s hard to say which way the legislative waters will go. The GOP does hold a significant majority, but memories of the recession are still fresh in enough minds to warrant caution.
As mortgage buyers and mortgage sellers, it’s important to keep one eye on legislation while also staying focused on your own financial future.
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