Dodd Frank Dismantled?

This morning began with a story on the possible dismantling of Dodd Frank. I can’t say I understand all the implications, but real estate has become more complex in the last 10 years, with little benefit from my perspective as a broker. Some of the regulations seem to have been more geared toward slowing a recovery, than encouraging or allowing the market to set values. In my simplistic view of the world, changes and increases to regulation don’t always have the intended effect.

“We have the best, most highly capitalized banks in the world, and we should use that to our competitive advantage,” he added. “But on the flip side, we also have the most highly regulated, overburdened banks in the world.” Gary Cohn, White House National Economic Council  Source:  2-3-17

I’ve mentioned it before, but I dislike absorption rates in appraisals. Using a trend to compare inventory makes sense in a big area, but what happens if the market begins to recover? The use of a trend could lengthen the time with depressed values and, in turn, lead to lower prices for owners, lenders trying to recover after a foreclosure and owners selling to avoid foreclosure. What decisions might change if a market in decline, remains at a low level for a longer period? I think the unintended consequences of regulating are a cost to the entire system. Consider the Consumer Financial Protection Bureau (CFPB). Essentially, the agency was authorized by Dodd Frank and meant to improve the stability of the sector with added rules….a lot of added rules. Appraisal guidelines, closing procedures….but above all compliance and a growth of government. The changes coming could be dramatic, but could only mean a rewriting of pieces of the act.

The freeing of credit, loosening of appraisal or underwriting guidelines, has the potential to extend gains in all sectors of the real estate market. I would prefer less interference in the changes to the market, but reduce or eliminate loans with low down-payment. Equity creates stability, in my opinion. The issues with an unstable market come from a lack of equity and from speculation. As prices falter or drop, loans with low equity default sooner. If all loans required a higher down-payment, the decline in a slowing market would be far less likely. If appraisal guidelines gave more leniency to appraisers, areas with few comparable sales would be less damaged in a slow market. I can remember a number of sales with too few similar comps. Time limits and geographic limits often resulted in comparable sales I would never have considered reasonable. One duplex was appraised as a duplex, then the lender decided it was really a single family home, then a duplex….. The value was unquestionable, but there were almost no comparable sales with similar square footage or at the same size and considered a “Duplex” at the time. When it becomes incredibly difficult to reach reasonable, there is a problem. Dodd Frank isn’t responsible for every regulation and I’m just thinking back to changes without a visible improvement I’m able to see for my industry. I’d like to see stability in the market and a stable banking system, but I think the same can be accomplished, at least for lending, with added equity required.

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