How Financial Reform Will Effect Home Loan Financing

This is the question on many of my client's minds these days as financial reform seems to be the flavor of the week. The question remains, what will this reform mean to home loan financing? Today we answer this question. Well, we'll try to answer it... needless to say until a bill is passed it is difficult to say how that bill will effect our market. With that said, the fundamentals we can discuss because regardless of the type of reform they are trying implement, we can be sure that regulation will lead to increased expenditures, a stiffened market with less options and a too big to fail mentality.

Let me be clear financial reform will lead to higher costs which will be passed on directly to the consumer. This means higher closing costs and a higher rate of interest. Why? Because there will be a cost associated with remaining in compliance. Companies will not take this cost off of their bottom line, instead they will increase fees across the board to make up for the additional costs incurred. That means consumers will be responsible for paying for this reform.

In addition the programs offered will become limited because the bill limits the types of programs that can be offered to consumers. Less options ultimately means higher cost. If you cannot tailor the program to fit your specific goals because that program is no longer available to you, you will be forced to settle on a program that does not address or solve your problem as efficiently.

This reform will reduce the number of lenders offering financing. The too big to fail mentality is supported in this bill and small companies will be put out of business should this reform pass. With their exiting the market it will mean less competition - those banks remaining will be able to charge higher fees free from small competitors undercutting their price structure. Unchallenged and unchecked there is nothing to stop this from happening, leaving only major conglomerates left to service home loan financing.

Innovation will be lost in the ruse of regulation. More regulation will hinder new financing products from being introduced into the marketplace. New programs are not necessarily the enemy and innovation should be encouraged, not snuffed out.

Finally this does not encourage banks to be less risky with their deposits. On the contrary, if anything it encourages risk because it sets up a backstop that the majors will know they can rely on should they get themselves into a pinch. The golden egg being a bailout pool that banks can draw from should they get themselves into more trouble. This is suppose to be a good thing because the pool will be funded by the banks themselves not taxpayers. But if we think about it, the banks will increase the cost of business so this pool is still coming from taxpayers - it just is not coming in the form of tax dollars collected by the IRS, instead the banks will collect the money for the IRS from us to establish this pool.

This reform is not a good idea for home financing. It will limit programs, while increase the cost of closing and rates offered. I am not suggesting that we do not need reform, I am simply saying the reform currently written is not the right solution and should not be supported.