[EXCLUSIVE] Will new lending standards stomp on Arizona’s housing recovery?

By Phil Riske, managing editor | Rose Law Group Reporter

In a January 10, 2014 Forbes op-ed, readers were asked what caused the housing bubble: greedy Wall Street fat cats; capitalism’s natural market instability; deregulation, or foolish laws passed as far back as 1930.

“We would never have suffered through the housing bubble if the federal government had not blundered into the housing market, which used to function efficiently on its own,” the editorial’s author, George Leef, concludes. He adds government has not learned two wrongs don’t make things right. “Instead, they made things far worse, creating a destructive bubble and then reacting by passing another disaster-laden law” — Dodd-Frank, Leef wrote. Independent Institute scholar Vern McKinley and Hester Peirce of the Mercatus Center recently wrote on Forbes Dodd-Frank is “a bigger ticking time bomb than Obamacare itself.”

The Dodd–Frank Wall Street Reform and Consumer Protection Act, which went into effect January 10, establishes extensive requirements for the mortgage lending industry, including detailed 
requirements for “qualified mortgages.” In order for banks to benefit from a “safe harbor” against lawsuits by borrowers, the loans they issue now under Dodd-Frank have to be considered qualified mortgages. Debt-to-income ratio cannot exceed 43 percent, points and costs cannot exceed 3 percent, and banks must independently verify a borrower has the ability to repay as required by eight different criteria.

“The new rules will unnecessarily limit mortgage options and access to credit, and thus further erode Americans’ freedom,” states the Heritage Foundation.

Here’s what the American Bankers Association (ABA) has to say:

“ABA continues to be concerned about the volume and complexity of new regulations being adopted, and the likelihood that the rulemakings will include inconsistent and conflicting provisions, which will threaten regulatory order and certainty.”

Overall, ABA believes that the new regulations go a long way in adding protections for consumers, but these reforms should aim to promote stable and accessible mortgage markets that are predominantly supported by private investment with reduced government involvement.”

Several real estate lawyers say many prospective home buyers are not aware of the new lending restrictions, but when they discover they don’t qualify under the new law, they will be prone to much more expensive mortgages because Dodd-Frank doesn’t shield lenders from lawsuits.

Closer to home

“The Federal Government does not even realize the negative effect this regulation will have on our economic recovery,” said Rose Law Group founder Jordan Rose. “I am very concerned about the new FHA mortgage limits and the Dodd Frank rules.”

The overall effect of Dodd-Frank on the real estate market this year is a matter of debate locally.

The Consumer Financial Protection Bureau says Dodd-Frank does not require all qualified mortgages to meet the 43 percent debt-to- income ratio. A loan can also be a qualified mortgage if it meets standards for loans backed or purchased by Fannie Mae or Freddie Mac, if it’s insured by a federal housing agency, or if it is offered by a small lender that holds the loan in portfolio. Right now, roughly 92 percent of mortgages fall into one of those three categories, the CFPB says.

At a recent industry event in Phoenix, some homebuilders said their data shows between 15-40 percent of the homeowners that were able to purchase homes last year would be unable to this year as a result mainly of FHA loan changes, plus banks having to tighten their standards because of the Dodd-Frank enactment.

Effective January 1, 2014, Maricopa County’s maximum FHA mortgage limit was reduced from $346,250 to $271,050 for single-family home purchases. The change applies to all Arizona counties, except for Coconino County, where the FHA loan limit drops from $450,000 to $362,250.

If a buyer’s offer is under contract, and a FHA case number was assigned by Dec 31, 2013, the buyer can obtain financing up to $346,250.  If buyers go under contract on or after January 1, 2014, they are only be able to finance a maximum of $271,050 with a FHA loan.

“I’m not certain [Dodd-Frank] is going to put the major damper on the housing market we may have expected immediately following the meeting last week,” said Jim Belfiore of Belfiore Real Estate Consulting. “FHA loan lending standards will have a more immediate effect, particularly for homebuilders offering homes with all-in closing prices above the new, lower FHA limit but below last year’s limit.  ‘Would-be FHA homebuyers are being pushed into the conventional loan market where FICO scores must be substantially higher,’ he said. ‘This will preclude far more buyers from qualification.  Additionally, re-emerging buyers, those having gone through a short-sale or foreclosure, will be out of the market for a longer period of time.”

Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business at Arizona State University, agrees.

“The mortgage brokers I have asked are telling me that Dodd-Frank is having very little effect on the mortgage market in Phoenix,” Orr said in an e-mail to Rose Law Group Reporter.  “More than 99 percent of loans approved in 2013 would have been consistent with the Dodd-Frank rules for [Qualified Mortgage], so there is no likelihood of a significant reduction in mortgages.

The reduction of the FHA loan limits, Orr agrees, is much more likely to have a more noticeable negative effect on the housing market.”

Jordan Rose said that besides modifications in the law, she hopes some entity will come up with ways for those who don’t qualify under Dodd-Frank or new FHA standards to get a mortgage at a reasonable cost.

Orr said, “Some creative souls are finding new loan vehicles to bypass Dodd-Frank, so overall I expect lending to ease this year, rather than get tighter.”