How Washington, D.C. and the Banking Industry is Killing the Housing Market, Part II: Dodd Frank Gone Rogue

I hate Dodd-Frank. It’s a good idea gone rogue. And if you value the ability of qualified people to buy real estate without having to place 20% to 50% as a down payment, you should hate it, too. Dodd-Frank is like nuking an entire apartment complex to get rid of bedbugs in one small 300 square foot unit.

Yes, underwriting rules and loans to “marginal” lenders were out of control and led to the housing bust that brought down our economy. Lenders played “hot potato”, making and packaging subprime loans and selling them off to investors until, when the truth came out,  the last investor got screwed because he was left holding the hot potato — a bunch of bad loans. Of course, the fact that the ratings agencies messed up on their projections didn’t help, where is their slap? The fact that lenders were pushing ARMs and interest-only products didn’t help. And now those banks are tighter than Scrooge about lending.

But Dodd-Frank is leaving the details up to a bunch of federal regulators. First of all, we did not elect these federal regulators so I find this almost bordering on unconstitutional. Secondly, what they are going to do will make it harder for people to get mortgages and further depress the housing market. You must know that the credit crunch is about 40% of the problem with the housing market. Bank lending is down by 9% even though bank’s financial profits have risen by 136%. Lending has fallen in 10 of the past 12 quarters despite the bailout. (I’m glad the national press is starting to cover this: we bailed out Wall Street in exchange for loans on Main Street, that ain’t happening.) Dodd-Frank is putting lenders on the hook, requiring them to retain a share in the risk in mortgages they sell to investors. In THEORY, that sounds great — just like taxing millionaires.

But now that a rule to implement this provision has been written, critics say the requirement will make it so hard to get a mortgage that it will further depress the housing market and undercut a struggling economy. “I’ve been in this business 32 years and I have never seen guidelines as tight as they are now,” said Scott Eggen, senior vice president for capital markets with PrimeLending, a mortgage lending subsidiary of Dallas-based Plains Capital Corp.

The proposed rules ignore Congress’  exemptions for “qualifying residential mortgages” — hey, what’s qualifying? The regulators have decided it’s 20 percent down, caps on a borrower’s  debt to income ratio, restrictions on loan terms and other limits that would restrict the number of loans that would qualify for these exemptions. It’s like saying, in effect, only he who gets there first will get the exemptions, then we shut the door.

Will we have people camping on the sidewalk for mortgages as they once did to put contracts on homes during the boom?

Briggs Freeman’s Susan Baldwin told me that Former President Bill Clinton was on The Today Show this morning talking about this very issue. He said that banks are not loaning, they are sitting on trillions but not making loans to small businesses because they don’t have to and are paying no interest on deposits. He’s right on th money but small business, heck Bill — housing!