How Wall Street Reform Will Affect Mortgages

I’m going to tell you something. It’s important and can perhaps one day save you a world of trouble down the road. Now, don’t be upset, don’t get angry, and don’t read into it too much, okay? Here it is: don’t get a mortgage you can’t afford.

I know what your initial reaction to that statement will be. At least if you’re like most common-sense-thinking people. You’re sitting there thinking, ‘Duh,’ right? Don’t get a mortgage you can’t afford. Who would think that anyone, anyone, would need to be told that? And what’s more, who would have even considered that an industry that makes money on interest paid back on loans would have to be spoon-fed that same idea? Ten years ago few, if any, of us would have even taken that comment seriously.

We would have laughed at the preposterous of its audacity. Yet there it is. And it is one of the many factors that contributed to the collapse of the economy and the real estate market during these past three treacherous years.

Predatory lending

We’re not going to get into the moral or ethical debate about predatory lending, but at its basic core, it was based on approving mortgages for individuals and families who simply couldn’t afford it. There have been reports during the past couple of years about people without jobs, without proof of much more than the fact that they were alive and breathing, were being approved for mortgages.

No job? No prospects? No savings? No problem.

I mean, think about that for a minute? Why in the world would anyone, and entire industry for that matter, allow this to go on?

I’ll tell you: greed. The housing boom was great. It was incredible. Everyone from realtors to mortgage brokers and lenders were raking in profits left and right. And while the vast majority of us played by the rules and did the right thing by our clients, we turned a blind eye to the problems surfacing many years ago. It may not have been our responsibility to report it or look for it or fix it, but it is now.

Reform means change

And the government isn’t wasting any time making sure that this debacle doesn’t repeat itself with its Wall Street Reform bill that passed the House and appears headed for passage in the Senate shortly. This bill includes a measure that makes predatory lending practices illegal. Banks and lenders will have to thoroughly verify that applicants will be able to make payments before any mortgage is approved.

Well, that makes absolutely perfect sense, doesn’t it? If this aspect of the bill (and I say aspect because there are others that will be up to independent debate that affect other aspects of the financial world) bothers your sense of capitalism, then you may want to either rethink your philosophy or seek another career path moving forward.

But how much will this change cost?

Ah, but the question here is how much this change will cost the average home-buyer. For one, getting a mortgage is going to take more work, and more time. Lenders will be more tight-fisted with their loans. And in any economic model, more time means more cost.

Yes, mortgages will end up costing more money for the borrower because of the increased workload to approve and finalize the terms. Of course, the effects of this bill won’t be immediate. It may take up to 18 to 24 months before the regulations go into effect. So, in the meantime, it might be a good idea to motivate potential home-buyers to save money and get their dream home now.

David Reinholtz

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