While The Motley Fool tends to shy away from discussing what's happening in D.C., there are instances where talking about broad political themes makes sense -- especially for your finances and the most important 12-letter word in Washington right now: deregulation.
With that in mind, Motley Fool analysts Gaby Lapera and Nathan Hamilton discuss how potential deregulation in the financial industry could lead to lower mortgage costs for homeowners and refinancers alike.
A full transcript follows the video.
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This podcast was recorded on Feb. 27, 2017.
Gaby Lapera: It can get expensive for the government, and we know that Trump, like you said,has been pushing for smaller government,and one of his big things with that is deregulation. Deregulation can affect the mortgage industry.
Nathan Hamilton:Yeah,it absolutely can. Deregulation,I would say, look at it in twodifferent forms. You have the impacts to the banks,and then Fannie Mae and Freddie Mac, government-sponsoredenterprises. The banks,if you look at pre-2008,before the financial crisis,they would essentially originate a loan,sell it off to Fannie Mae or Freddie Mac,and they would mostly make money off the origination fees. They weren't too concerned about, is this a high-quality mortgage or a sub-prime mortgage. They'd justgive it to Fannie Mae or Freddie Mac toguarantee the payments. But, withDodd-Frank coming inafter the 2008 crisis, itrequired the banks to burdensome of the costs of those bad loans thatthey sold off. What that does is it increases the cost for banks to bring in borrowers, and that's impacted by a higher mortgage rate. So, if you look at it, non-bank lenders like Quicken aren't regulatedunder the same infrastructure, and they've been able to come in and grab atremendous amount of market share. If we go back roughly five or six years ago, non-bank lenders were 10% of themarket, complete market share. A few years later,they were up to 50%, and that was on the back of regulation. So, you look at it as, OK, if there are some Dodd-Frank acts that are repealed, whichthe administration has mentioned could happen, they'relooking into it currently, maybe you see bigger bankscoming into the market again, maybe they do reduce the interest rates for borrowers. So,that could be a positive effect,if you look at it from a straight interest rate perspective. So,that is one thing to consider.
Lapera:Yeah. Thatwhole thing gets really interesting. WithDodd-Frank, you have the creation of theConsumer Financial Protection Bureau, the CFPB. One of the things that happened with big banks was they weregiving loans to people who couldn't necessarily repay them,and they were giving multiple loans topeople with very bad credit. And the government said, "This isreally shady of you, this is predatory lending," and they really cracked down on the big banks. The CFPBconducted a lot of investigations. So, the banks stopped lending to people who were ... marginal, I guess?
Hamilton:That's safe to say.
Lapera:Yeah. People whomaybe didn't have the best credit scores, who maybe didn't have the most secure jobs. And the CFPB andthe government said, "You'retaking advantage of these people, you know they can't repay you and you'recharging terrible amounts of interest." That means that that population became very underserved. Andthat's where you're seeing a lot of these fintechcompanies like Quicken Loans move into the area. That'swhy that market exists in the first place.
Hamilton:It'sinteresting to point out,keeping on with the CFPB,if I were to explain it in thesimplest terms, it's essentially, their whole goal is to take the small legal fontat the bottom of the application forcredit cards, mortgages, auto loans, andmake it more prominent, so you'remore educated and you understand what you're actually getting into. And there are some other things that the CFPB does thathave a financial cost, a financial burden on banks. The TrumpAdministration has said, "OK, maybewe're going to deregulate, there's a potential that the CFPBcould be closedentirely, the budget could be impacted," there area lot of different things at play, which for higher-riskconsumers that maybe aren't as educated, if it's you going into a mortgage, keep an eye on all the details,the rates, all the small fonts, all that information, closing costs, everything. It really issomething important to pay attention to that,without the CFPB,it would likely not have been there in the first place.
Lapera:Yeah,make sure you do your homework and do your math. It's actually really interesting,I know people who have gotten mortgages pre-CFPB and post-CFPB. The CFPB required that banks makevery prominent at the top of any paperwork that they give people what your interest rate is,and what that actually means for you long term, and they do that for credit cards and mortgages, I believe. It's a clarity in lending type thing,it has a name like that.
Hamilton:Yeah,with credit cards specifically,they made the minimum payment information more prominent on your bill, there'srequirements to include that. They also required that credit card issuers will let you waive one late payment fee per year. That's a requirement, soit's your right as a cardholder to be able to have that. That'sessentially what the CFPB does.
Lapera:Yeah. Actually, if listeners want a more substantial discussion on the CFPB,John Maxfield and Irecently did an episode on that. Ifyou want the link to that, justsend me an email firstname.lastname@example.org,I'm super happy to send it to you. Or,just search the last fewIndustry Focusepisodes, it should jump out at youwhich one it's going to be. So, we'll see what happens with the CFPB. Itmight be gone, it might be restructured --
Hamilton:Itmight be impacted.
Lapera:Yeah. It'sinteresting, too, because with the CFPB, we're not really 100% surewhether or not its constitutional. But it's such an interesting and new thing. We've never really had a regulatory body that's like, "We're going to look out for the consumers when it comes to banks." It's kind of like the FDA, except for banks. Is there anything else you want to talk to us about with mortgages?
Hamilton:We've talked a lot about different things where costs could be lowered, costs could be increased. I'll just look at a few takeaways from it, which, if you look at the overall mortgage rate interest rate scenario, where are rates likely to go in the future, 2017, during the Trump Presidency, the Fed has signaled that rates are going to increase. That's going to be the biggest driver or your mortgage rate. So, if you arelooking at refinancing, if you bought a homein the last few years,if you haven't done the refinancing yet, look at doing so,take some time to shop mortgage rates. We have them on our mortgage rates center. You canget in contact with various lenders and so forth. The time is likelyworth the dollar value to you,because you can save a tremendous amount byrefinancing. So, if you haven't done it,get your butt off the ground andstart doing it. The other thing to look at is,regulation might decrease. Theoverall net impact,we don't necessarily know,because there's so many factors at play. So, this one situation isgoing to reduce rates,this one is going to increase costs for banks. There's amyriad of different situations at play. So,ultimately, we'll have to see where that ends up. But it does harp on the fact that, with the CFPBpossibly being restructured, beingderegulated some, it'simportant to pay attention to the details and be educated onwhat you're actually signing.
Lapera:Definitely. One thinglisteners can do if you're in the process of buying a housefor the first time is, a lot of states and counties offer free first home-buying courses,and a lot of them contain really useful information on sources for loans andmortgages and how to knowwhether or not you're getting a good deal. Right now, there'sa lot of government programs bothat the state and federal level to help first-time home buyers buy a house. That, inconjunction with our awesome websitefool.com/mortgages, can be a reallywonderful resource for people.
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