What effect will President Trump have on mortgages?
So, what effect will Donald Trump's election have on mortgages and people who are looking to buy or refinance a home?
The real estate magnate said fairly little about the housing market during his campaign, but his stance on cutting regulations and rolling back Obama initiatives give some indication of what he's likely to do.
There have also been a number of mortgage-related matters on the GOP wish list that will likely move forward now that Republicans will have control of the presidency and both houses of Congress.The crystal ball is always murky when it comes to predicting the future, but there are a number of things that are worth keeping an eye on, depending on what Trump and the Congress actually decide.
Here are some of the main ones:
Mortgage rates may finally be at the end of their long run of rock-bottom lows. They've already jumped four-tenths of a percent since the election, and more could be on the way. Federal Reserve Chair Janet Yellen recently hinted the Fed may be raising the federal funds rate soon, which sets the pattern for interest rates overall.
Aside from that, Trump and Republicans in Congress are keen to dismantle the Dodd-Frank Act and other regulations, which they view as a burden on business and finance. Rolling back Dodd-Frank's major provisions could make it easier for banks to lend, creating an increased demand for credit. And greater demand for credit means higher interest rates, simply as a matter of supply and demand.
Similarly, Trump's proposals for tax cuts could free up capital that could trigger increased investment, meaning more demand for credit and higher rates.
On the other side, some of Trump's plans could generate higher costs for businesses and consumers – which would tend to slow the economy, at least in the short term. Tearing up trade agreements and imposing tariffs would drive up prices on a broad range of goods. However, it's not clear whether congressional Republicans, who generally favor free trade, would support any new tariffs, though they may well embrace new trade agreements.
Trump's plans to expel unauthorized immigrants and enact strict immigration controls could reduce the low-wage workforce that currently does much of the labor in agriculture and food processing, along with a substantial presence in construction and service jobs. That could cause prices to rise – perhaps sharply for produce and meat – meaning a dampening effect on the economy, which would put downward pressure on rates.
One of the main complaints about the Dodd-Frank Wall Street Reform and Consumer Protection Act, as it's officially known, has been that it increases compliance cost for lenders. That's been a particular complaint of small lenders, such as community banks and credit unions, who can't absorb those costs as readily as big banks can. A rollback of Dodd-Frank could enable those smaller lenders to expand their lending and reach out to a broader range of customers – increasing mortgage availability.
One of the things Dodd-Frank does is require lenders to ensure borrowers can afford their mortgage payments – a measure enacted to prevent lenders from extending credit to unqualified borrowers, to avoid a repeat of the 2008 crash. Lifting that restriction would give banks of all sizes more freedom to lend and would likely make it easier to obtain mortgages, home equity loans and refinancing. The question is whether doing so might reignite another housing bubble – and possibly another crash down the road, or if lenders will avoid repeating the excesses of the early 2000s.
Another element of Dodd-Frank was the creation of the Consumer Financial Protection Agency (CFPB), whose mission includes protecting borrowers against predatory lending. It doesn't seem likely Trump or congressional Republicans will seek to do away with the agency outright, but it's a good bet they will replace its current single-director model with a multi-member board – which Republicans have urged since it was created. That would likely make it less nimble in responding to new problems, but also might shield it from big swings in policy from one administration to another.
Fannie Mae and Freddie Mac
Ever since the 2008 financial collapse, there have been calls to wind down Fannie Mae and Freddie Mac and replace them with something else. To date, there have been a number of proposals for doing that, but none have gotten very far. Meanwhile, Fannie and Freddie have returned to profitability under government conservancy and have even returned a $60 billion surplus to the federal treasury above what it cost to bail them out.
Republicans have been the primary advocates for winding down the two mortgage guarantors, so those efforts may get a boost under the new administration and Congress. The question is, what will replace them?
Fannie and Freddie guarantee about half of all U.S. residential mortgages, which allows lenders to offer lower rates and easier credit on those loans than they could without such backing. Fannie and Freddie themselves have an implied guarantee from the government, which strengthens the credibility of the guarantees they provide.
Advocates for winding them down would like to see a more limited government role in the mortgage market, in particular by reducing the government's exposure to liability on mortgage guarantees. But a more limited government guarantee would mean greater risk for banks and other lenders – and higher rates and tighter credit on those loans as a result.
The fate of HARP
HARP, the Home Affordable Refinance Program, has been one of the Obama administration's more popular programs enacted in the wake of the fiscal crisis. Enacted as one of the administration's first major moves in 2009, it's allowed millions of homeowners with little or negative equity to refinance to a new, lower mortgage rate.
The program, which is only available to borrowers with Fannie Mae or Freddie Mac mortgages, is currently scheduled to expire after Sept. 30, 2017. However, the Federal Housing Finance Agency (FHFA) plans to replace it with a new, streamlined refinance program that will do largely the same thing.
But will Trump allow it to go forward? As a federal agency, the FHFA needs to be mindful of the president's wishes, and Trump could even replace current Director Mel Watt before his term is due to expire in 2019. So a lot depends on if Trump regards HARP and its successor as undue government meddling in the mortgage market. But it could be a largely moot point anyway if mortgage rates rise, taking away most of the incentive for refinancing in the first place.