Congress enacted the Dodd-Frank Act three years ago to remedy lending excesses that took root before the financial meltdown.

But the real outcome of this intervention is a modern mortgage market where big banks can no longer lend to lower and lower-middle class borrowers, banking analyst Dick Bove with Rafferty Capital Markets said Monday.

The effect of this development is the creation of a two-tiered housing finance system, where lower-income homeowners have fewer options, the banking analyst said.

As a result, the market is now dominated by upper middle-class and upper-class borrowers, Bove suggested. So even if the Dodd-Frank regulations were toted as remedies designed to help struggling Americans and protect them from poor lending practices, it has had the adverse effect in recent years.

From Bove’s perspective post-Dodd-Frank rules have virtually shut out the least represented borrowers, making the Alt-A product virtually obsolete, Bove told HousingWire. 

A report from Moody’s Analytics and the Urban Institute -- released on Monday -- attempted to illustrate this split.

It was no surprise to Bove that the firms’ study showed the average FICO score on purchase loans now hovering at 750, up 50 points from pre-crisis markets.

When looking at loans tracked just by Ellie Mae, the average FICO dropped to 734 in August -- which is improved, but not by very much.

Borrowers with FICOs under 700 have less representation, based on data from the Moody’s/Urban Institute report.

This is not strange, Bove claims. He’s been arguing for more than a year that regulations stemming back to Dodd-Frank have all but frozen big banks out of the lower-end lending market, hurting borrowers in that segment.

"It’s virtually impossible for larger banks to underwrite lower-income households’mortgages,” Bove told HousingWire.

Regulatory changes came swiftly in 2010, promising protections for the most vulnerable borrowers, but, in fact, they were freezing them out of the market entirely, the analyst argues.

"What the change in underwriting standards did was force large banks to only underwrite mortgages for people with high FICO scores and low loan-to-value ratios because they would have the lowest capital requirements," Bove said.

Add in put-back risk – or the threat the GSEs will require a bank to buyback loans considered defected – and the risk has caused larger banks to only support originations for the most qualified of borrowers, Bove pointed out.

As for what this means for a large segment of borrowers, Bove said a more extreme view would be that low-income individuals will eventually be pushed into more public-housing situations and rentals. From his perspective, no one in Congress has a plan or the initiative to fix the problem.

The high FICO criteria was something Bove recognized a year ago. "The constraints on the market are pushing FICO scores up dramatically,” he said. “I wrote a year and a half a go that this was going to happen. It’s not surprising," he concluded.