An amazing thing happened in Washington during the past week, something that positively impacts mortgage rates. A new report shows that the Dodd-Frank Act, a piece of 2010 legislation which the President and much of the Congress have vowed to emasculate if not completely overturn, actually works.
The purpose of Dodd-Frank is to prevent another 2008 mortgage meltdown, a meltdown which resulted in some $16 trillion in financial losses as well as more than 7,000,000 foreclosures according to RealtyTrac.
It’s hard to understand why anyone would be against the Dodd-Frank Act. Surely big banks and Wall Street do not want a return to the days of option ARMs, no doc loan applications, interest-only mortgages, and big losses. Lenders of all sizes do not want to lose market share to toxic mortgage products which ultimately will fail in large numbers, thus driving down the value of all real estate — including real estate used to secure even the most conservative forms of financing.
If Dodd-Frank is so bad for the banking sector then we would expect to see smaller profits yet what we have seen is the exact opposite. According to the FDIC, in the fourth quarter of 2016 banks reported profits of $45.6 billion vs. $21.4 billion in the fourth quarter of 2010.
Under Dodd-Frank bank quarterly profits doubled during the past six years. So here’s a question: how about your income, has it doubled during the past six years?
Actually though, everyone – banker and non-banker – has benefited from Dodd-Frank. The proof is in figures just released by the Mortgage Bankers Association which show that the foreclosure start rate dropped to .28 percent in the fourth quarter.
“This is the lowest rate of new foreclosures started since the fourth quarter of 1988,” said the MBA.
Since 1988! That’s almost 30 years ago.
One can argue that foreclosure start levels would actually be lower if only we did not include so-called “legacy mortgages” originated prior to 2008.
We know that some portion of today’s foreclosure starts – and maybe a very large portion – actually had their beginning during the go-go financing era which took place before the mortgage meltdown and before Dodd-Frank.
Mortgages Rates and Foreclosure Levels
As evidence, consider that in the second quarter of 2015, Marina Walsh, MBA’s Vice President of Industry Analysis, reported that “legacy loans continued to account for the majority of all troubled mortgages. Seventy-three percent of the loans that were seriously delinquent, either more than 90 days delinquent or in the foreclosure process were originated before 2008.”
Some congratulations are in order.
First, there’s nothing wrong with the nation’s banks making healthy profits – consider the alternative.
Second, the nation’s mortgage lenders have done an exceptional job originating “qualified mortgages” such as FHA, VA, and conforming loans which represent little risk to themselves, to borrowers, to the lending system, or to the national economy. The results can be seen in today’s foreclosure start levels.
Third, because the foreclosure start rate is so low there’s no problem attracting investor capital. The fact that so many investors are willing to put their money into mortgages is one of the prime reasons why real estate loans continue to be available at historically low rates.
So maybe common sense will prevail in Washington. The country has done well under Dodd-Frank, the financial system seems really healthy, and interest rates are low so why fiddle with a good thing?
(Photo courtesy of Seibe)