Dodd Frank

Filed in Market Information by on June 13, 2018 0 Comments

I was taking a little brain break, as my daughter would say, when I saw this post on Facebook from a Realtor friend of mine. I thought this was great information and wanted to share. I will add my prospective at the end, but I wanted to leave what she wrote intact. Thank you, Lisa, for this great post. You can find her here.

A hot topic of controversy at the moment; the rollback of Dodd Frank has caused quite an up rise of discussion in today’s news. Fears justified from the 2008 financial crisis are resurfacing as laws which held banks accountable post recession are being loosened and repealed. With that being said however, new regulation breakdowns are bringing along with them an overdue revitalization to the lending industry — and correspondingly, the real estate industry. Below is a simplified breakdown of the major highlights which the revised Dodd Frank entails — and how these changes mean to you. [Special highlight being — it should be easier for you to get a mortgage — whoohoo!]

The number of banks labeled systemically important or ‘too-big-to-fail’ will be reduced with the threshold of assets moved from $50 billion to $250 billion. This will significantly lower the numbers of big banks which are required to follow stringent lending supervision criteria, therefore allowing higher levels of leniency in underwriting abilities.
What this means to you? It should be easier for you to get approved for a mortgage, especially from a smaller local credit union (whom are not considered ‘not-too-big-to-fail). Beyond letting smaller institutions to better compete in the lending game, the relevancy of this change will largely apply to 1099 employees with inconsistent monthly incomes and others with less than ideal debt to income ratios (which are currently set at a 43% threshold).

Student loan perks – new legislation will include two provisions affecting the repayment of student loans.

What this means to you? Essentially if you as the student borrower were to die; lenders would be mandated to release any co-signers of your loan from remaining debt (a serious advantage point when leveraging your next co-sign request on a property purchase — thanks grandma). The other provision is this legislation also works in reverse if in case the co-signer dies, the student borrower be would not be default.

Free Credit Freeze

What this means to you? You will be relieved of the fee which in the past was charged to freeze your credit report, which would protect you from a scammer using your personal credit information (such as in the recent case of the 2017 Equifax crisis)

I really like how she broke this down into three primary areas but let me elaborate a little as it relates to real estate investors. Although this was a hot topic, I would add that there is not a lot that will change for most investors. Especially in the short term. It is true that the biggest impact will be on small locally owned banks and credit unions. She is correct that the less restrictive guidelines could open the door for more creative lending. The problem is, most smaller banks are not currently set up for this, so it will take some time to get their process in place, if they choose to change their underwriting guidelines. More creative lending could mean higher DTI, less documentation, and shorter maturity dates. For single family homes, most investors will continue to borrow conventional money before ever going to a community bank, which is one reason I believe the impact on investors will be subtle. We choose to borrow conventional money over bank money because it is cheaper with much longer terms. I typically see investors use banks when they have too many properties to go the conventional route, they are doing a commercial transaction, or a construction loan. However, anytime an investor does not qualify for conventional money, banks could be an option.

Another benefit is increased competition. Many small banks have struggled to be profitable because the overhead from their compliance team was draining profits. They needed large compliance divisions to follow all the restrictive rules in Dodd Frank. Now that they are exempt from a lot of those restrictions, they can shrink their compliance departments and can be nimble. This will reduce the number of mergers and acquisitions we have seen since the crisis. We might even see new banks open their doors for business. Knowing that the largest banks have only gotten bigger since Dodd Frank was enacted is scary and an unattended consequence. More bank competition is good for consumers and businesses, and bad for big banks and Wall Street.

Although I don’t believe this new legislation is a giant splash, overall this is positive news for real estate investors. There are still many questions on how this new legislation will impact banks, credit unions, the CFPB, consumers, and small businesses. How quickly will this trickle down to you and I? As you get more experienced and start doing larger projects, you will find that bank relationships are very valuable and anything that makes it easier to get money as an investor is positive.

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