10 Years After Dodd-Frank

Opinion Piece | The U.S. mortgage-backed securities famous JPMorgan Chase CEO, Jamie Dimon, railed against mortgage regulations during the bank’s second-quarter earnings call earlier this month. He indicated the reason mortgage rates aren’t 1.6 percent or 1.8 percent “is because the cost of servicing and origination is so high due to the enormous number of rules and regulations [that] are put in place [which] do not create safety and soundness.” He was obviously referring to The Dodd-Frank Wall Street Reform and Consumer Protection Act, the massive piece of financial reform legislation passed as a response to the financial crisis of 2008 that just hit its 10-year anniversary. Dodd-Frank established a number of new government agencies tasked with overseeing the various components and aspects of the financial system that were believed to have caused the 2008 financial crisis, including banks, mortgage lenders, and credit rating agencies. The U.S. adopted an unprecedented volume of the new regulations outlined in the Act over the last decade, affecting everything from market structure to capital standards and balance sheet liquidity. 

The American economy operates as the most productive and resilient in the world and our mortgage market plays a crucial role in facilitating that strength. The historic success of the U.S. mortgage market has been solidified by a regulatory framework focusing on borrower protection, transparency, safety and soundness. Many will argue that our system is more transparent, safe and sound than in 2008. Banks are now better capitalized than at any other time in history, largely due to the provisions in Dodd-Frank.

The U.S. mortgage-backed securities (MBS) markets package and sell ownership interests in mortgage loans. There were over $2 trillion in MBS issued last year and the COVID-19 pandemic created market volatility which was a real-time stress test. While markets in the U.S. and abroad experienced significantly increased volatility and volumes and at times dislocation, mortgage operations in the U.S., including at American Eagle Mortgage, did not falter during this period of extreme pressure. This was due in large part to technological innovations and common-sense regulatory changes implemented since the global financial crisis. Importantly, keeping mortgage markets open and liquid was crucial to maintaining investor confidence and returning to more normalcy in terms of volatility and volume.

While Mr. Dimon would love to see rates go lower (wouldn’t we all!), that would have several downsides. It would require rendering the risk retention rules put in place over the last decade obsolete, thus making these securitized products riskier for investors. The increased risk to investors would be passed on to borrowers in the form of a higher cost of borrowing for homeowners. Put it all together, and the conclusion is that barring an unexpected change in regulations or a way past the coronavirus pandemic, right now is about as good as it gets for mortgage rates. We’re always here at American Eagle Mortgage to keep you up-to-date on rates and assist you in the borrowing process. Give us a call today!

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