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Dalrymple: Is it more difficult to borrow money with new regulations?

QUESTION

I’ve heard that all of the new regulations in connection with mortgage lending have made it more difficult for homeowners and buyers to borrow money. Is this true?

Answer

Well, the situation isn’t as bad as many bankers believe, and it’s certainly not as good as the Consumer Financial Protection Bureaus, the watchdog super agency formed after the financial crisis, would have us think.

The Dodd-Frank Act was passed at the apex of the Great Recession with the purpose of correcting practices that were deemed to have led to the meltdown. The law mandated that regulations were to be written by various agencies to make certain the intent of the law became practice.

There were a lot of jokes about the volume and complexity of these regs, often comparing them to the heftiest volume we could think of, whether we’d read it or not: “War and Peace”. Well, last month the Consumer Financial Protection Bureau came out with its final compendium of rules just covering one part of the Bureau’s mission: making and servicing mortgage loans. The book of regulations runs to 900 pages; “War and Peace”, depending on the edition, is just over 1,000.

This deluge of detail naturally results in higher production costs for lenders. And lenders pay a lot of attention to compliance. If the rules aren’t followed there are very expensive civil penalties, which even can spill over into criminal charges.

When manufacturing expenses increase, be it widgets or home loans, some of that cost is inevitably passed on to consumers. Not necessarily all, because business in general is surprisingly adept at streamlining production lines. But the cost to acquire the product does go up.

A case in point involves appraisals. The big mortgage conduits, Fannie Mae and Freddie Mac, which buy and securitize most of the consumer related mortgages made in the U.S. are increasing requirements relating to appraisal quality, so appraisers are charging more. Consequently, I got a call just the other day from an account rep for a large wholesale lender saying that their standard appraisal fee was going up by $125.

Still, there’s plenty of mortgage money available, and it’s currently very cheap. However, the real estate financing industry, in order to comply with today’s tight regulatory strictures, has standardized the process to accommodate the bulk of loans made nationwide. Which means that, if you’re buying a three bedroom, two bath house, with a two car garage in a suburb of Kansas City, you’re fine. That is, as long as your debt to income ratio is within the guidelines, and you have at least a 650 credit score. But, for example, if your property happens to be non-conforming in any way, such as a condominium project with a high percentage of rental units, or if you keep a couple of horses on a small acreage, your options narrow dramatically. There are loans available in these instances, but they’re more expensive, with less favorable terms.

Also, private mortgage money was once a viable tool of last resort for many borrowers. Because of the new regs, that resource as almost disappeared completely. Of course, Grand County is one of those areas in which properties fall outside the generally accepted property criteria. There are hobby farms, and so-called “condotels” that may have some short term rental units in the complex. For markets like this, and other resort areas in Colorado, local lenders continue to be an important factor. These lenders can often keep the loans that they make, and tailor programs to accommodate the region’s unique real estate and borrowers. So, there’s a lot of mortgage money waiting to be lent, and, for now, it costs less than at any time in history. But, if you don’t fit the mold, it gets more scarce, and more expensive.

Pat Dalrymple is a former bank president who has been making mortgage loans in western Colorado since 1967. He’s currently an advisor to Grand Mountain Bank’s Mortgage Lending Outreach Initiative. He welcomes your questions on lending and banking, and can be reached at dalrymple@sopris.net.