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 of Industry 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.
A full transcript follows the video.
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're listening to Financials edition, taped today on Monday, February 27th, 2017. My name is Gaby Lapera and joining me in the studio is Nathan Hamilton, one of our in-house analysts at The Motley Fool. Hello, Nathan!
Nathan Hamilton: It's good 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-in analysts, 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 about mortgages, and what the Trump Administration could mean for mortgages. And I'm not going to lie, this is a little bit selfish 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] And I know that you are responsible for putting that site together, so I'm really excited to have you here to talk about mortgages and president Trump, which is something that everyone loves to talk about right now. Everyone loves to talk about politics. And as regular listeners know, politics give me heartburn. I am pretty sure there is Tums waiting for me when I leave the studio.
Hamilton: We'll make sure to focus just on personal finance so it's a little bit easier.
Lapera: Yes. Thank you. Please, no political opinions here. You can have them inside, but we're using our not-inside voices.
Lapera: OK. Let's talk Trump. Where would you like to start with this? You are our guest, I'd like you to pick the first course.
Hamilton: I think it's important to understand what 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 are somewhat 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 has already come out and said, in 2017, there are likely going to be two to three more rate increases. This is on 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, now might 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, an independent body. So, that's why Nathan was saying that Trump can't really affect that directly. Additionally, the interest rate increases are part of a long trend that we've been seeing with the recovery of the economy. That's why interest rates haven't been pushed up super high in the past few years. It's because they have been waiting until they saw the signs.
Hamilton: Yeah, until the economy improved quite a bit, or there were signs it was going to improve quite a bit.
Lapera: Exactly. The Fed is really interesting. It's kind of like this mysterious shadowy body. I know that I've said this a few times, but if 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're probably going to raise them up/we're not going to raise them." And they have been saying, "Things look pretty good so far, we think we're going to raise them." They're not going to be aggressive. That's something to remember, they're not going to push it up by 2% points, it's going to be basis point increases.
Hamilton: And that'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. If you look at the past 10 years, the 30-year mortgage peaked right around 6.76%. 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 still historically low. And even 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%. And I 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." And it'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 is essentially a loan for borrowers that may not be able to put down 20% like a bank would require. FHA comes into the market and tries 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. And what the Trump Administration did -- it may have been on day one or two of the presidency 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 the mortgage insurance premium by 0.25%. If you look at what it actually means in dollars, it's roughly about $30 per year. That's what the difference would be for the average homeowner. So it's not a huge change, but it definitely does signal something that the administration may be looking into in the future when they do have direct influences. Getting the government somewhat 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 Mae and Freddie Mac and so forth, other mortgage players, they are there to make the market somewhat more efficient. There is a taxpayer cost for those. In 2008, taxpayers had to bail out Fannie Mae and Freddie Mac by tens of billions of dollars, and they're still repaying those loans.
Lapera: Actually, fun fact, they have repaid their loans. It's really 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, and shareholders 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've superseded the amount that they borrowed in the first place. So, we'll see 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 are possible ways that that could be affected. If you look 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 higher origination fees, mortgage rates, and so forth. But really, I would say, if you look at the grand scheme, big picture, the Fed probably has more of an impact in the near-term.
Lapera: Yeah. And you might be wondering, if you're a listener, why the federal government would be invested in people buying homes at all. Why would they want that to happen? Historically, people who buy homes in an area, that helps increase the prosperity of that area, because people who own homes are going to require a lot of services that employ people in the area. It's part of this traditional idea of the American Dream that everyone can own their own home. So, I think part of it is emotional and symbolic, and part of it is hard economics. Owning a house really does help the area that you're in. Staying away from the politics of that, and why people want to do one 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 two different forms. You have the impacts to the banks, and then Fannie Mae and Freddie Mac, government-sponsored enterprises. 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 just give it to Fannie Mae or Freddie Mac to guarantee the payments. But, with Dodd-Frank coming in after the 2008 crisis, it required the banks to burden some of the costs of those bad loans that they 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 regulated under the same infrastructure, and they've been able to come in and grab a tremendous amount of market share. If we go back roughly five or six years ago, non-bank lenders were 10% of the market, 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, which the Administration has mentioned could happen, they're looking into it currently, maybe you see bigger banks coming 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. That whole thing gets really interesting. With Dodd-Frank, you have the creation of the Consumer Financial Protection Bureau, the CFPB. One of the things that happened with big banks was they were giving loans to people who couldn't necessarily repay them, and they were giving multiple loans to people with very bad credit. And the government said, "This is really shady of you, this is predatory lending," and they really cracked down on the big banks. The CFPB conducted 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 who maybe didn't have the best credit scores, who maybe didn't have the most secure jobs. And the CFPB and the government said, "You're taking advantage of these people, you know they can't repay you and you're charging terrible amounts of interest." That means that that population became very underserved. And that's where you're seeing a lot of these fintech companies like Quicken Loans move into the area. That's why that market exists in the first place.
Hamilton: It's interesting to point out, keeping on with the CFPB, if I were to explain it in the simplest terms, it's essentially, their whole goal is to take the small legal font at the bottom of the application for credit cards, mortgages, auto loans, and make it more prominent, so you're more educated and you understand what you're actually getting into. And there are some other things that the CFPB does that have a financial cost, a financial burden on banks. The Trump Administration has said, "OK, maybe we're going to deregulate, there's a potential that the CFPB could be closed entirely, the budget could be impacted," there are a lot of different things at play, which for higher-risk consumers 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 is something 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 make very 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's requirements to include that. They also required that credit card issuers will let you waive one late payment fee per year. That's a requirement, so it's your right as a cardholder to be able to have that. That's essentially what the CFPB does.
Lapera: Yeah. Actually, if listeners want a more substantial discussion on the CFPB, John Maxfield and I recently did an episode on that. If you want the link to that, just send me an email at firstname.lastname@example.org, I'm super happy to send it to you. Or, just search the last few Industry Focus episodes, it should jump out at you which one it's going to be. So, we'll see what happens with the CFPB. It might be gone, it might be restructured --
Hamilton: It might be impacted.
Lapera: Yeah. It's interesting, too, because with the CFPB, we're not really 100% sure whether 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 are looking at refinancing, if you bought a home in 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 can get in contact with various lenders and so forth. The time is likely worth the dollar value to you, because you can save a tremendous amount by refinancing. So, if you haven't done it, get your butt off the ground and start doing it. The other thing to look at is, regulation might decrease. The overall net impact, we don't necessarily know, because there's so many factors at play. So, this one situation is going to reduce rates, this one is going to increase costs for banks. There's a myriad 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 CFPB possibly being restructured, being deregulated some, it's important to pay attention to the details and be educated on what you're actually signing.
Lapera: Definitely. One thing listeners can do if you're in the process of buying a house for 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 and mortgages and how to know whether or not you're getting a good deal. Right now, there's a lot of government programs both at the state and federal level to help first-time home buyers buy a house. That, in conjunction with our awesome website fool.com/mortgages, can be a really wonderful resource for people. If you guys have any questions, feel free to email me. Please keep 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: As usual, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have recommendations for 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 you very much to Jackson Taylor Harris, our totally awesome producer today.
Hamilton: Big thumbs 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: But we're getting it to you. It's coming.
Lapera: We're getting it to you! And all the other episodes this week should be on time. I hope everyone has a great week!