President Obama signed the Dodd-Frank Act into law in 2010. This was in response to the financial crisis that took place in 2007-2008.
What is the Purpose for the Dodd-Frank Act?
The main purpose of the Dodd-Frank Act was to enforce stricter regulations and transparency with consumers in order to prevent further financial crises. Since the financial crisis was a result of ongoing activity that was unmonitored, the crash hit the economy pretty hard. Many lost their jobs and many lost their homes because they were unable to afford their mortgage payments. With stricter regulations and monitoring, Congress hoped to prevent future financial crises bailed out with taxpayers’ money.
How Did the Subprime Mortgage Crisis Happen?
Basically, people who were not in great financial shape were getting loans, even when they shouldn’t have. People whose credit backgrounds don’t meet conventional mortgage standards are able to get subprime mortgages. In short, subprime mortgages have higher interest rates because it is riskier, which means the monthly payments are higher for subprime borrowers. To accommodate, adjustable rate mortgages were offered since they have a low fixed rate for the first several years. With ARMs, the monthly payments would temporarily be much more affordable. Borrowers didn’t realize how expensive it could get once the initial period was over. Once the initial period ended and the interest rates adjusted, many were unable to afford their payments and ended up foreclosing on their properties and losing their homes.
Lenders were also accepting loan applications without going through the verification process to make sure the borrowers were qualified. These loose regulations became accepted throughout the industry so borrowers were starting to exaggerate their income on their applications.
Did the Dodd-Frank Act Succeed?
Everyone has different views and perspectives so I’m sure that many will both agree and disagree on whether or not the Dodd-Frank Act was a success. The biggest positive that came out of the Dodd-Frank Act was the long-overdue restructuring that now prioritized the protection of consumers. There were many factors that contributed to the subprime mortgage crisis, but it all boils down to people not following the rules to get more money. With The Dodd-Frank Act, more eyes are on the mortgage industry and policies were created to make sure this didn’t happen again.