Wall Street Reform Law

The new Wall Street Reform Law – Restricting borrowers

Last year, lawmakers presented a bill that would require lenders to retain cash reserves equal to 5% of the total value of all the mortgage loans they originate.  By having 5% of their own money at stake, the idea of the bill was that lender’s would be less likely to loan to borrowers who were a high risk of default. 

When the bill was first presented it gained quite a bit of support, including support by the National Association of Realtors (NAR).  However, there was concern as to what types of loans this new requirement would be applied to.  The NAR fought for an exemption to this requirement on conventional residential mortgages.  Since these types of loans have always proved to be the most secure and were never considered a risk to our economy, it makes sense that they should be exempt.  As a result, The NAR won its argument and got the exemption.  However, regulators may now be undermining this victory.

As regulators have begun to write the rules to this new law, they have discussed how to define what types of loans would be included under it.  They are currently considering including any loan in which the down payment and other standards did not exceed the minimum amount required.  In essence the exclusion may only apply to those loans in which more than 20% was put down on the loan, even though it is possible to finance a conventional loan with as little as 10% down for purchases of home that will be owner occupied. 

Some lenders are actually pushing to increase this minimum down payment amount.  In December, Wells Fargo supported an idea to make the minimum down payment of 30% for residential mortgages that would be eligible for this exemption.  Ultimately this may cause a borrower to be faced with the decision of having to come up with more money to put down, or possible having their interest rate increase to offset the new risk the lender is taking on by having to hold 5% of the mortgage amount.

Although I would be on of the first to agree that reform is needed, I also don’t want to see reform which results in only borrowers with large sums of money being able to qualify for a conventional mortgage while everyone else is forced to suffer a higher interest rate.