A mortgage is many homeowners single biggest expense each month, so it pays to understand the costs -- especially for new home buyers and people searching for a lower rate to refinance their house.With the 2017 in full swing, the Trump administration has made some announcements about changes they'd like to make, and has already taken some steps toward enacting some of them.
In this week's episode ofIndustry Focus: Financials, Motley Fool analysts Gaby Lapera and Nathan Hamilton take a look at how mortgage rates and interest rates in the U.S. might change in 2017 under the Trump administration, and what's likely to stay the same regardless of the presidential administration. Also, they talk about what the Consumer Financial Protection Bureau is, what the Trump administration wants to do with it, and how the bureau might change in the next four years.
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A full transcript follows the video.
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This podcast was recorded on Feb. 27, 2017.
Gaby Lapera: Hello, everyone! Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. You'relistening to Financials edition, taped todayon Monday, February 27th, 2017. My name is Gaby Laperaand joining me in the studiois Nathan Hamilton, one of our in-houseanalysts at The Motley Fool. Hello, Nathan!
Nathan Hamilton: It'sgood to be here. How are you?
Lapera: I'm really good,I'm super excited to have someone in studio. Not that I don't love my call-inanalysts, they are wonderful, awesome people,but it's really exciting to see your facial expressions.
Hamilton: I know, not behind a camera, not on Skype.
Lapera: Exactly. So,we are here today to talk aboutmortgages, and what the Trump Administration could mean for mortgages. AndI'm not going to lie, this is a little bitselfish on our parts,because we have a new website, fool.com/mortgages -- and,mortgages has a silent T in it,in case you didn't know that.
Lapera: Mort-gages. Mort,from the French for death. A gauge for death.[laughs] AndI know that you are responsible for putting that site together,so I'm really excited to have you here to talk aboutmortgages and president Trump,which is something that everyone loves to talk about right now. Everyone loves to talk about politics. And asregular listeners know,politics give me heartburn.I am pretty sure there is Tums waiting for me whenI leave the studio.
Hamilton: We'llmake sure to focus just on personal financeso it's a little bit easier.
Lapera: Yes. Thank you. Please, nopolitical opinions here. You can have them inside, but we're using our not-inside voices.
Lapera: OK. Let's talk Trump. Where would youlike to start with this? You are our guest,I'd like you to pick the first course.
Hamilton: I think it's important to understandwhat the president has an impact on, and what they influence,and what they probably don't have a direct impact on,specific to mortgages. Mortgages aresomewhat based on what the Fed does. President Trump,any president before and any president in the future,doesn't necessarily say what those rates are going to be. But,during the Trump presidency, the Fed hasalready come out and said, in 2017, there arelikely going to be two to three more rate increases. This ison top of what happened in December with the rate increase. So,if you're looking at refinancing,if you're looking at buying a new home, nowmight be a good time to at least look at the refinancing side of it, because rates may increase in 2017 during Trump's presidency. He can't, essentially, issue an executive order and say, "We're going to increase/decrease mortgage rates." That's not necessarily something he can influence.
Lapera: Yeah. A few things to unpack there. The Federal Reserve board, the people who decide whether or not those interest rate increases, are, in theory, anindependent body. So,that's why Nathan was saying that Trumpcan't really affect that directly.Additionally, the interest rate increases are part of a long trend that we've been seeing withthe recovery of the economy. That's why interest rates haven't been pushed up super highin the past few years. It's becausethey have been waiting until they saw the signs.
Hamilton: Yeah,until the economy improved quite a bit, or there were signsit was going to improve quite a bit.
Lapera: Exactly. The Fed isreally interesting. It's kind of like thismysterious shadowy body.I know that I've said this a few times, butif we had a little magic globe or crystal ball that we could look into,that would be great. But they do try and signpost like, "Yeah, we'reprobably going to raise them up/we're not going to raise them." Andthey have been saying, "Thingslook pretty goodso far, we think we're going to raise them." They're not going to be aggressive. That'ssomething to remember, they're not going to push it up by 2% points,it's going to be basis point increases.
Hamilton: Andthat's important to put into context, the whole longer-term side of it. If we look at where rates are now, even though they've increased quite a bit since December, they're at historic, multi-decade lows. Ifyou look at the past 10 years,the 30-year mortgage peaked right around6.76%. Right now, they're sitting at, I believe it's 4.3% this week. So,you have to put it into context. Sure, rates have spiked. But they're stillhistorically low. Andeven if there are 2-3 rate increases in 2017,they will likely still be historically low.
Lapera:Yeah,absolutely. I think that's really interesting, because there's this generational divide. I remember opening my first bank account,and the interest rate on the savings account was, like, 0.01%. AndI was talking to my parents,and they were like, "No,when we first opened savings accounts,of course the interest rate was like 5%."I was like, "I can't even imagine getting 5% on my savings." Andit's the same thing with mortgages. Of course, they were paying far more in interest than I would be today if I decided to buy a home. So,let's talk a little bit about this executive order, and the FHA loan mortgage insurance. First of all,what is the FHA?
Hamilton: Yeah,we'll get a little bit into the details here. Mortgage 201, 101,is kind of where we'll balance it. An FHA loan isessentially a loan for borrowers that may not be able to put down 20% like a bank would require. FHA comes into the market andtries to make it cost efficient and cost-effective for higher-risk home buyers. So, you can put down as little as 3.5% with an FHA loan. Andwhat the Trump Administration did --it may have been on day one or two of thepresidency of the administration -- is, reverse an Obama-era order that decreased the mortgage insurance rate premium. When Trump came in, he essentially flipped it and raised themortgage insurance premium by 0.25%. If you look at what it actually means in dollars, it's roughly about $30 per year. That'swhat the difference would be for the average homeowner. So it's not a huge change,but it definitely does signal something thatthe administration may be looking into in the future when they do havedirect influences. Getting the governmentsomewhat outside of the mortgage market,because if you look at it, the government is involved with the FHA --
Lapera: FHA stand for Federal Housing Administration.
Hamilton: Yep,Federal Housing Administration,Fannie MaeandFreddie Mac and so forth, other mortgage players, they are there to make the marketsomewhat more efficient. There is a taxpayer cost for those. In 2008, taxpayershad to bail out Fannie Mae and Freddie Mac bytens of billions of dollars, and they're still repaying those loans.
Lapera: Actually,fun fact, they have repaid their loans. It'sreally interesting,because they're still in conservatorship,technically --
Hamilton: So,they take all the profits, still?
Lapera: Yeah,the government is still taking all the profits, andshareholders are actually suing and saying, "It's time to let that go."I think they have repaid it. They've surpassed it by a lot, in the millions of dollars that they'vesuperseded the amount that they borrowed in the first place. So, we'llsee what happens with that,maybe we'll do another episode on it.
Hamilton: But,like I said, if you look at the administration,they have called for a reduction in big government, and those arepossible ways that that could be affected. If youlook at it as very simple, plain vanilla way as,if they are making the market more efficient and they're removed from the market, it could increase costs for borrowers,whether it comes in the way of higherorigination fees,mortgage rates, and so forth. But really,I would say, if you look at the grand scheme, big picture, the Fedprobably has more of an impact in the near-term.
Lapera: Yeah. Andyou might be wondering, if you're a listener,why the federal government would be invested in people buyinghomes at all. Why would they want that to happen?Historically,people who buy homes in an area, that helpsincrease the prosperity of that area,because people who own homes aregoing to require a lot of services that employ people in the area. It'spart of this traditional idea of the American Dream thateveryone can own their own home. So,I think part of it is emotional and symbolic, andpart of it is hard economics. Owning a house really does help the area that you're in. Stayingaway from the politics of that, and why people want to doone thing or the other --because you're right, 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.
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 at firstname.lastname@example.org,I'm super happy to send it to you. Or,just search the last few Industry 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 website fool.com/mortgages, can be a reallywonderful resource for people. Ifyou guys have any questions, feel free to email me. Pleasekeep in mind that I cannot give you personal advice. So don't email me with a very specific question about your personal life,because I probably can't help you,because I'm not Ann Landers,and I'm also not a certified financial planner.[laughs] So,keep that in mind. Thank you so much for joining us, I really appreciate it.
Hamilton: Yeah, absolutely, I'm glad to be here.
Lapera:Asusual, people on the program may have interestsin the stocks that they talk about, and The Motley Fool may have recommendationsfor or against, so don't buy or sell stocks based solely on what you hear. Contact us at email@example.com or by tweeting us at MFIndustryFocus. Thank youvery much to Jackson Taylor Harris, ourtotally awesome producer today.
Hamilton: Bigthumbs up from him.
Lapera: Totally rad thumbs up.[laughs] And,thank you to everyone for joining us today. Oh, and, sorry guys that this episode was a little bit late,we had a little scheduling snafu.
Hamilton: Butwe're getting it to you. It's coming.
Lapera: We'regetting it to you! Andall the other episodes this week should be on time.I hope everyone has a great week!
Gaby Lapera has no position in any stocks mentioned. Nathan Hamilton has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.