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Financial Reform: How It Could Affect the Housing Industry?

The Restoring American Financial Stability Act of 2010 was introduced by Senator Christopher Dodd (D-CT), the chairman of the Senate Banking, Housing, and Urban Affairs Committee, on April 15, 2010. This legislation would bring comprehensive reform and increased regulations to the financial sector to stabilize and protect the economy against future crises.

This massive and controversial bill, almost 1,500 pages long, contains four main components according to a statement made by Senator Dodd. Specifically, the bill:

1) ends “too big to fail” bailouts;
2) creates an advance warning system in the economy;
3) increases transparency; and
4) protects consumers from unsafe financial products.

This legislation is similar to the Wall Street Reform and Consumer Protection Act of 2009, which was introduced by Representative Barney Frank (D-MA) and passed the House of Representatives on December 11, 2009.

By reforming the financial sector, this bill (and possible amendments) could have major implications for the future of the housing market, both market-rate and affordable. This bill would regulate the lending practices of banks and financial institutions, including regulating against risky transactions. It would also increase consumer protections against predatory lending practices.

In addition, amendments have been offered that would require a mandatory down payment amount to purchase a home — a requirement that could hurt many first-time home buyer programs that use home buyer counseling and sweat-equity in place of down payment requirements.

A major point of contention regarding this legislation and the housing market is the role of the government. One amendment that could have had a significant impact on the housing market was an amendment offered by Senators John McCain (R-AZ), Richard Shelby (R-AL) and Judd Gregg (R-NH), which would have ended the government ownership of Fannie Mae and Freddie Mac within two years.

Republicans argue that Democrats are ignoring a central element of reforming the financial market by not including Fannie and Freddie. While Democrats say it is too early and too risky to determine the future role of Fannie and Freddie because of their dominance in financing the housing market. Government-related entities backed 96.5% of all home loans during the first quarter of 2010, according to The Wall Street Journal. The Senate rejected the amendment on Tuesday 43 to 56.

Senators are still set to consider over 200 amendments to this bill on the Senate floor, meaning a final vote is unlikely until next week at the earliest. This also means the full impact of this bill on the financial and housing sectors is not yet fully known.

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