The Effect of 1Dodd-Frank on Divorcing Citizens - Part 1: QRM

Michelle Malkin's quick 2analysis of Dodd-Frank is spot on:
"Dodd-Frank, the 2,300-page financial "reform" monstrosity spearheaded by Capitol Hill corruptocrats, turned 1 this week. It made too-big banks bigger. It made too-risky incentives riskier. It made a lousy economy lousier. Billed as a "consumer protection" act, Dodd-Frank has succeeded phenomenally - in protecting and stimulating the business-stifling business of government."

Michelle Malkin has said 'Happy 1st Birthday' to Dodd-Frank by observing that only 12% of its rules have been issued. Even though the math of it leads us to expect that by the end of 2018 we might expect the bureaucracy to have completed its issuance of rules, in fact there is little hope that this monstrous bill will ever be fully implemented. If God is gracious to us, it will not.

The effect of Dodd-Frank on divorcing clients is the same as it is on all homeowners and borrowers: disastrous. But, it's difficult to explain all of it especially when no one person knows or understand the entire bill.

Today though, I focus on the harmful effects of QRM required by (Dodd-Frank).

QRM or Qualified Residential Mortgage is one of ten thousand euphemistic monikers that allow Barney Frank and Chris Dodd to pretend that they are protecting consumers from bad lending practices . . . the same lending practices they encouraged and insisted were just fine as late as 2006.

It's a bit complicated and the comment period is just closing on the matter but the basic reasoning is that if borrowers have more "skin in the game" default is lessened by that same degree of "skin." Also, the rule doesn't put direct limits on mortgage originating and lending. Rather it requires banks to retain a certain risk in its portfolio of loans if they do not meet the standards. It's a back-door way of setting loan standards.

The effect of the QRM rule could be that maximum LTV (Loan To Value) ratios in most loans will be limited to 80% for purchases and 75% for refinances. At least, that's what the current bureaucratic banter is about.

You're right - I'm reading your mind right now - that would kill the housing market. The "skin-in-the-game" argument only sounds plausible. It really doesn't hold water. No research has shown that greater down payments decrease the likelihood of default. Loss of a job is still the #1 trigger for foreclosure. Second to that seems to be divorce, of all things! It's amazing and a school child could figure it out - when people don't get paid, they usually cannot make their house payments. The amount of money they put down on the house doesn't factor into this inability to make the mortgage payments.

And while I'm on it, most people forget that Fannie Mae and Freddie Mac worked very well for 73 and 34 years respectively most of the time on 95% LTV financing maximums. So, there's no science and only cherry-picked evidence to support any notion that increasing down payments to 20% would cure any of the ills in the housing market.

But economic realities rarely inform statist politicians who are hell-bent on using government to exact their utopian schemes upon capital-producing, tax-paying citizens even if their scheme seems to swing away from their previous designs (of no or lower down payments and loosened credit standards).

Heretofore, we have been able to obtain mortgage refinancing loans for as high as 95 - 96.5% LTV ratios (credit and income qualifying assumed). Provided the Owelty Agreement and Lien were constructed properly so as to avoid the severe limitations of Texas Equity financing (you should have attended my CLE-Accredited seminar on "The Proper Use of the Owelty Agreement and Lien"), divorcing borrowers were able to effectively roll in debt (including legal fees) that enabled them to make housing costs supremely more affordable for their post-divorce situation. In many (if not most) cases, we have been able to structure a dramatic decrease in overall monthly expenditures for the grantee-borrower in these transactions.

I needn't tell you how important this is to many clients who are facing a financial tenuous position after their divorce is finalized. And I might add, it's one of the reasons I'm very happy and satisfied with what I am doing - helping folks at the intersection of divorce and mortgage finance.

This part of Dodd-Frank will virtually bring to an end the ability to finance a buyout in nearly all cases. Unless a couple's house is leveraged at 50% or less of its value, there wouldn't be enough "equity" value to access a 50/50 buyout. A $100,000 house with a $50,000 mortgage could finance an additional $25,000 for a total of $75,000 (or 75% LTV ratio). Of course, this doesn't factor closing costs and room for include the "rolling in" of debts in the buyout. But mostly, it's a rare property that owes only ½ of its total market value to the bank.

Other than calling your congressman and senator and telling them to repeal Dodd-Frank, there's not a lot one can do other than cross one's fingers - not a good strategy, is it. 3 There are bills in both houses of Congress that seek to repeal Dodd-Frank. My fear is that a Republican House will piece-meal its repeal by trying to fix it; and the Democrat Senate will tinker around a bit with it and perhaps make it more incomprehensible and harmful.

If you have questions about any of this, please email me or call me at 972-724-2881.
Noel Cookman

NOTES
1 Text of Dodd-Frank can be accessed at: http://docs.house.gov/rules/finserv/111_hr4173_finsrvcr.pdf
2 Michelle Malkin's article can be accessed at: http://www.creators.com/opinion/michelle-malkin/the-beltway-industry-full-time-employment-act.html
3 H.R. 87 in the house and S. 746, S. 712 and an amendment (S.AMDT.394) to the Economic Development Revitalization Act of 2011 on June 7 to repeal the law.