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The Dodd-Frank Act Turns Five

The Lingering and Lasting Effects
Part 2 of a 2-Part Series

Stuart Quinn    |    Housing Policy

This is part 2 of a 2-part blog series covering the 5-year anniversary of the Dodd-Frank Act.

The Rules

Perhaps the most notable of the rules completed by the CFPB as of 2013 include: Qualified Mortgage/Ability to Repay (QM/ATR); Mortgage Servicing Rules and the Integrated Mortgage Disclosures (TRID).

Qualified Mortgage and Ability-to-Repay

There was significant concern in the housing finance industry about the QM/ATR rules and their subsequent impact on future originations, litigation and mortgage pricing. Within the rule, the CFPB established an exemption for Fannie Mae and Freddie Mac (GSEs) that allowed loans to be QM eligible so long as they were approved under their automated underwriting systems. This exemption and further exceptions for smaller institutions and rural lenders largely muted the near term origination concerns going forward. The rules solidified existing trends in the origination space. For example, low-documentation and no-documentation loans peaked at the end of 2005 at 42 percent, and by the time the Dodd-Frank Act was signed in July of 2010, the number had tumbled to 4 percent of purchase originations. Furthermore, adjustable-rate mortgages, which are not banned but are treated differently than fixed-rate mortgages under the QM rules, had also largely disappeared from the marketplace comprising only 7 percent of purchase originations. One origination trend that did pivot in March 2011 was the weighted average debt-to-income (DTI) ratio for purchase mortgages, which peaked that month at 37 percent.

In April 2011, the Federal Reserve released their initial proposed ATR/QM rule indicating that debt-to-income ratio would be one determining factor, though no specific threshold was cited. Since then, the weighted average back-end DTI of purchase originations has dropped to 33 percent, approximately 10 percent below the final 43 percent DTI threshold established by the CFPB under the final ATR/QM rules that went in to effect in January 2014.

Mortgage Servicing

The mortgage servicing rules established by the CFPB contained similar provisions seen in previous consent orders and the 49 State Attorney’s General settlement. The cost of servicing, particularly non-performing servicing, has continued its upward trajectory and foreclosure timelines in specific jurisdictions remain protracted despite large declines in volumes since 2010. Five years later, the question remains whether true national servicing standards have been attained and if they are even a realistic goal? The divergence between performing and non-performing servicing continues to beg the question of whether the appropriate compensation structure is in place. Furthermore, Congress continues to discuss the potential impacts of treatment of mortgage servicing rights (MSRs) under the new international Basel III standards, which increases the risk weighting of the assets.1

Integrated Mortgage Disclosures

The legal process is not short-winded and a number of rules under the Dodd-Frank Act have not been finalized or become effective, such as the integrated mortgage disclosures (TRID) or the Home Mortgage Disclosure Act. Broader reforms within the legislation on too-big-to-fail, systemically important financial institutions designations, executive compensation and the Volcker rule remain outstanding or under debate. And while mortgage reforms continue to be implemented, the results are difficult to measure due to the absence of a true private-label securitization market, inaction on GSE reform, GSE credit policy changes and the pristine credit quality of originations in the post-Dodd-Frank era.

The dialogue in Washington revolving around the Dodd-Frank Act continues to bubble. How many more rules will the CFPB finalize and what effect will these regulations have on the financial services industry? The next five years will be just as interesting to analyze when it comes time to celebrate the 10-year anniversary of the Dodd-Frank Act.

[1] Latest 2014 figures released by MBA indicates that servicing costs declined from 2013 to 2014, though remain highly elevated as compared to 2009-10.

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