The Federal Reserve is reportedly considering easing capital requirements for some large banking institutions, in addition to the deregulation bill that has already passed. Overall, the current business environment for banks is better than it has been in years.
Separately, mortgages have become easier to obtain than in the immediate post-crisis years, and there are reports that mortgage fraud is on the rise, which indicates people may be purchasing homes they can't afford. Could this combination of looser regulations and easier -- and fraudulent -- credit be a recipe for another housing crisis? Host Jason Moser and Fool.com contributor Matthew Frankel, CFP, discuss all this and more in this clip from Industry Focus: Financials.
A full transcript follows the video.
This video was recorded on Oct. 8, 2018.
Jason Moser: Let's talk for a minute here, there's some information out here recently from the Federal Reserve, they are going to try to broaden the number of banks receiving regulatory relief. This is ultimately going to change, potentially, how it defines a big bank. The thing that caught my eye with this article, first and foremost, was the fact that they're looking to change some of these regulations to make it easier for banks to lend money, which is obviously a very important factor in the banking business model. That's how they make their money, it's all about lending it out.
Now, I read this, and then I also read an article that was talking about how more people are lying on their mortgage applications this year than last. Mortgage fraud risk jumped more than 12% year over year at the end of the second quarter, according to CoreLogic. They say that one in every 109 mortgage applications is estimated to have indications of fraud.
Now, we know that one of the big catalysts behind our financial crisis years ago was the fact that you didn't really have to do much of anything to get a loan to buy a house, much less five houses. Banks got called on that eventually. There was a lot of bad behavior in how they were lending money to people who probably shouldn't have been borrowing it in the first place. It became contagious and really set us back a number of years there. Do you really feel like there's an opportunity here for banks? Do you feel like they can walk that thin line into relaxing some of these regulations without causing housing crisis 2.0?
Matt Frankel: Yes and no. I'm all for deregulation when it's done responsibly. We've already seen some bank deregulation happen recently. We talked about this a few episodes back. They raised the threshold for what's considered a systematically important financial institution all the way from $50 billion in assets to $250 billion. That's a big leap. This is a whole subset of banks that's going to save a ton of money in regulatory expenses. This action by the Fed could do the same. It also reduces capital requirements. It's too early to tell because we don't know the details of how much it could reduce capital requirements. I don't really see them rolling it back to the pre-crisis levels, but that's just me. I hope I'm right about that.
As far as the mortgage fraud thing, one out of every 109, that's definitely an uptick, but that's not enough to set off housing crisis 2.0. The thing to point out with that is, most of the fraud we're seeing is income-related, meaning people getting fake pay stubs and things to make it look like they can afford a house more than they really can. We're not seeing credit score fraud. Your credit history is really tough to fake. The big difference between before the financial crisis and now is, like you said, anybody could get a mortgage. Right now, the credit standards are still relatively high. Those are set by Fannie Mae and Freddie Mac for the majority of homebuyers. Until you see that really start to relax, which we haven't yet, I don't think we're in danger of housing crisis 2.0
Now, having said that, these two things, the deregulation combined with an uptick in mortgage fraud, could definitely cause an uptick in mortgage defaults, which could hurt the housing market. I don't see it as housing crisis 2.0 yet. But I'm definitely watching for warning signs that it's heading in that direction.
Moser: Yeah, I agree with you. I'm all for deregulation, as long as it makes sense. I think there's a responsible way to go about it. When you're talking about banks and their role in our economy, and housing's role in our economy, obviously, there needs to be some form of regulation there. Yeah, it seems like we just need to keep an eye out for potential signs.
Between a perhaps inflated housing market, I tell you, what really makes me a little nervous is that amount of student debt that's still outstanding, and how that's going to affect the generations to come and their ability to spend and save. Then, to your point about the difficulty of getting a mortgage, I will say, I've noticed a big difference. From the first house that my wife and I bought back in 2005 to the house that we bought last year, they really put us through the ringer there in getting the loan, and we both have very good credit histories. Hopefully, that won't change very much. We'll certainly need to keep an eye on that.