Will Unintended Consequences of Dodd-Frank Make a Mess of the Mortgage Market?

The Dodd-Frank Wall Street Reform and Consumer Protection Act that passed was enacted into law in 2010, commonly referred to as simply “Dodd-Frank”, is supposed to lower risk in various parts of the U.S. financial system. It was named after former U.S. Senator Christopher J. Dodd and former U.S. Representative Barney Frank because of their significant involvement in the act’s creation and passage. Dodd-Frank established new government agencies such as the Financial Stability Oversight Council and Orderly Liquidation Authority, which monitors the performance of companies deemed “too big to fail” in order to prevent a widespread economic collapse. Ultimately, the purpose is to protect consumers from the crazy home-lending excesses that caused the Great Recession of 2008. Banks are exiting from the mortgage business in large numbers, primarily because of the high operating costs and heightened litigation risks imposed by the Dodd-Frank financial-reform law. As banks leave the industry, supply is reduced.

If all else remains equal, basic economics teaches that reducing supply increases the costs paid by consumers. Access Mortgage Research & Consulting of Columbia, Md., points out in a newsletter that pending home sales fell sharply over the summer from a three-year high and that economists who responded to a Zillow survey predict that annual home-price gains in the U.S. will slow to 4% in 2014 and dip even lower in the following four years versus an estimated rise of 7% this year. Freddie Mac’s economists see price growth of 5% to 6% in 2014. The U.S. Census Bureau says home ownership for the under-35 set was 36.8% in the third quarter, versus 42% in 2007’s third quarter.

The roll call of banks shrinking their mortgage footprints is stunning in length and breadth. Ally Bank left the market this month. In February, JP Morgan Chase announced that it would fire 13,000 to 15,000 mortgage-banking employees through 2014. Bank of America cut 2,100 mortgage workers in September. Citigroup plans to lay off about 2,200 in 2014. SunTrust Banks has said that it will not make loans to mortgage brokers as of Dec. 31. EverBank Financial  and Cortland Bancorp have left the same markets. Wells Fargo, the No. 1 U.S. mortgage lender, ended joint ventures with mortgage brokerages this year, mainly because Dodd-Frank does not favor such relationships.

Dave Stevens, the CEO of the Mortgage Bankers Association, says that the business risks of mortgage banking now outweigh the probable rewards because of heavy-handed new banking laws and regulations. Dodd-Frank, supply-side reduction, and increased risk to the suppliers who remain, may just give pause to those who are making a decision to invest on their own in a rental or commercial property. More than ever, investors may benefit from experienced management and trained real estate professionals when it comes time to making a decision as to whether investing in real estate is an appropriate investment and the proper investment vehicle.