April 8th, 2014 4:51 PM by Gregg Mower
I have been watching the housing statistics for a long time and I am seeing a very interesting trend of houses falling out of escrow. If you look at the Local Tri-county area of Sacramento you will see that in March there were 1702 homes that went pending and only 1183 sold properties. In February 1281 went pending and only 985 were sold and in January there were 1227 home that went pending and 979 sold. What does that mean you might ask? Well it means that more homes went into contract than actually made it to the closing table. This could mean several things but I am wondering if this has anything to do with the new Dodd Frank rules that went into effect January of this year.
If in fact more transactions are not closing escrow and more are falling out due to the new rules then something should be done to fix those rules. The rules limit the debt-to-income (DTI) ratio to 43% and this could be a factor in less loans getting approved where they would have last year before the rules went into effect. In prior years underwriters could use other factors to determine if a borrower could make the payments other than having to give heavy weight to the DTI ratio. In the past an underwriter could see that if a borrower had a good credit score and money in the bank left over after the close that the likelihood of the borrower defaulting would be less even if the DTI was high. Now even if the borrower has money in the bank after the down payment, even if they have more money in the bank than the mortgage amount, if the DTI is higher than 43% then by law an underwriter cannot approve the loan. The exception would be if the underwriter received an automated approval from FNMA’s Desktop underwriter (DU) or FHMC’s system then the underwriter could exceed the 43%. The problem is, in many cases, DU does not approve the loan because the DTI is too high.
So the only way this can be changed is by changing the law. This would have to come from congress in order to change the rules. Since the Mortgage crisis most of the risk that has traditionally been in the hands of the mortgage companies has switched to laws created by the government. So if a Mortgage Company makes a loan and it goes to default and the government finds that the Mortgage Company’s underwriting may have approved the loan with a DTI higher than 43% then it could be said that the Mortgage Company is at fault for poor underwriting. So if that is the case the Mortgage Company is less likely to make loans where the DTI is higher than 43%. Thus, we will have more loans being declined than we have in the past for the simple reason the Mortgage Companies don’t want to take on additional risk of a high DTI loan. This is now policed, if you will, by the Consumer Finance Protection Bureau (CFPB) and in the case where Mortgage Companies are found guilty of making high risk loans the remedy may be that the loan has to be forgiven and the borrower who would have normally lost their home now owns it free and clear. When lawyers get wind of this there will be lawsuits and lending will get even tighter. This is a case where the government has created rules that are intended to help the consumer will inevitably hurt them. As usual leave any comment you might have.