Saturday, December 1, 2012

Dodd-Frank stings the Real Estate Market

The fiscal cliff notwithstanding, there are a number of financial issues that have the potential to sink the housing market—just when we have begun to see light at the end of the tunnel. Most of us have heard of the Dodd-Frank Act designed to mandate Wall Street reform, but the media has not spent much ink on the pending rulings on mortgage origination requirements also mandated by the Dodd-Frank.

For one, ponder the eventual fates of Fannie Mae and Freddie Mac, now in their fourth year of conservatorship. And for another, consider the Federal Reserve’s recently proposed Basel III capital standards program, which have the potential to deliver a crushing blow to both REALTORS® and consumers in today’s still-fragile housing recovery.

Basel III is an international regulatory standard on bank capital adequacy, stress testing and market liquidity developed in Europe by the Basel Committee on Banking Supervision in 2010. Basel III was developed in response to the deficiencies in financial regulation revealed by the recent financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

All this sounds good, but the European Organisation for Economic Co-operation and Development (OECD) estimates that the implementation of Basel III will decrease annual GDP growth by 0.05–0.15%. Another smack in the face that won't help our economy. Critics suggest that Basel III requirements will also increase the incentives of banks to game the regulatory framework, which could further negatively affect the stability of the financial system.

Taken together, the outcomes of Qualified Mortgage (QM), Qualified Residential Mortgage (QRM) and Basel III rulings now under consideration would likely shut down the mortgage finance market to a good number of home buyers, and would vastly change the home ownership landscape.

Ken Trepeta the National Association of REALTORS (NAR) Real Estate Services Director Ken says “If the ability-to-repay rules of QM are written too narrowly, it will tighten credit even more for all but the most credit-worthy buyers. As for QRM, if the rule requires a minimum down payment of 20 percent, much of the first-time buyer market outside of FHA would simply disappear.”

Among the most worrisome proposed Basel III standards are detailed risk-weighting requirements that would force banks to hold more capital for all but the most conservative loans, making almost all loans more costly for consumers as well as harder to get. “If regulators do the wrong thing on any one of these issues,” he said, “the result could be a ticking time bomb for the housing recovery we are just beginning to see. Even if regulators get it right,” Trepeta warned, “credit overall will likely be tighter. If they botch it, it could be disastrous.”

NAR has both vigorously opposed any changes that would limit or undermine the current Mortgage Interest Deduction, and has also been working closely with the House Financial Services Committee and the Senate Banking Committee for two years to ensure that Wall Street reform legislation does not adversely affect REALTORS® or consumers. But the Mortgage Interest Deduction may soon be a thing of the past.

In a July 2011 letter to Fed Chairman Ben Bernanke, then NAR President Ron Phipps wrote, ”regulation of the mortgage lending industry is becoming so complex that it threatens to weaken the system instead of curing abuses,“ and that the lending industry and regulators ”have over-corrected in response to abuses that occurred in the middle of the last decade.“

The letter calls on the credit and lending industries and Federal regulators to reassess the entire credit structure and look for ways to increase the availability of credit to qualified borrowers who are good credit risks.

In September, 2012, NAR President Moe Veissi sent a follow-up letter to Bernanke on behalf of the Realtors and the American people, once again warning of the potential effects of these unresolved issues. The hope is Berrnanke would be able to preserve this widely used deduction, and influence the rule-makers. Authority for the rule-making lies with the Consumer Financial Protection Bureau (CFPB), which has until Jan. 21, 2013 to issue the final ability-to-repay/QM regulations, to take effect 12 months later.

Dane Hahn is a real estate professional practicing in Charlotte and Sarasota Counties. You can reach him at 941-681-0312, or at See him on the web at

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