How Dodd-Frank Creates Low Mortgage Rates

The Real Reason For Low Mortgage RatesAn 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)

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6 Comments on "How Dodd-Frank Creates Low Mortgage Rates"

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  1. Warren abramson says:

    To think DF helped lower mortgage rates is crazy! The market did that. All DF did was increase costs for all people whether it be mortgages, car loans, credit cards,etc.
    Consumers get nothing but crazed by these regulations. Author should work as a loan originator and see what the real world is like.
    the worst part of the law is the 3 days when The CD is sent. no need for this.
    If a person puts down 5% at p and s are they going to forefit this because they don’t like something about the CD? Don’t think so.

  2. K Edward says:

    It is clear from the authors bio where his viewpoint comes from. Of course he is cheerleading for DF. I have to agree with LGR’s comments as well as K. Lewis, Ron Xavier and Terry Ryan. DF has not been beneficial for a large segment of homeowners due to increased costs, burdensome regulation and lack of product. This speaks to the low home ownership rate RX talked about in his post. It has hit small business owners particularly hard in qualifying for homes.

    As for the mortgage industry DF gutted the small brokerage shops due to regulatory cost burdens. Yes the Big Banks have thrived, but like most policies of the last 8 years it is the middle/lower class & small businesses that have taken the brunt of the hit.

  3. Lets Get Real says:

    The article is title “How Dodd-Frank Creates Low Mortgage Rates”, but I don’t see anything in the article showing any actual link between D-F and lower rates.
    All this article seems to do is state the dates when events occurred and then say one caused the other simply because of the timeframes when they happened. There is no evidence presented that one caused the other, or that one would not have increased more if the other was not in place. This is like saying “The average yearly temperature increased almost .5°F between 2007 and 2014. Since this corresponds with dates President Obama was in office , it must mean he causes global warming”. Sounds ridiculous, huh?
    Also, it is true D-F is not much of a burden on the banks, but banks are not the only companies in the mortgage business. Nonbank mortgage companies, particularly the small to medium sized ones, do not have the same scale and resources as the huge banks you keep talking about. They are the ones most burdened by overregulation. Not to mention they also face an unbalanced playing field when recruiting because bank MLOs are not required to be licensed. Honestly, with the regulatory world today, I do not see how anyone could start a new small mortgage company. So not only do customers eat the increased cost associated with having to implement and manage these regulations, but the regulations also discourage small companies from entering or staying in the industry. This decreases competition, which in turn results in fewer options and higher costs for borrowers.

  4. K Lewis says:

    What you fail to cover in this piece is the COST of implementing and maintaining all the regulations from Dodd Frank. Yes, some of it was good and “cleaned” up some areas of mortgage lending. But, the cost to originate a mortgage has doubled. Where do you think those costs are recovered? They are charged to the consumer or buried in the interest rates.
    Could mean rates would be even lower if the regulatory burden was lifted somewhat…

  5. Ron Xavier says:

    If the author read the report, he would know that bank profits rose $9 billion because of higher interest rates. In 2007, quarterly profits in the first 2 quarters averaged $36 billion, which is comparable to last quarter’s profits after considering inflation. There was no D-F then. D-F has disenfranchised those with lower credit scores, which accounts for the low foreclosure rates. Home ownership is near 40 year lows. Millenials and the poor are most affected. Many minorities. D-F regulation adds costs to mortgage origination, title insurance and other settlement services, thereby making homeownership more difficult. In short, D-F doesn’t work at all for many people.

  6. Terry Ryan says:

    Dodd-Frank had nothing to do with low interest raises! When the US has almost $20 Trillion in debt, do you think it wants to see higher interest rates around the country when it can’t pay the interest on its debt? Get real! Do the math!

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