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.
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 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 So, you look at it as, OK, if there are some Dodd-Frank acts that are repealed, which the administration has mentioned could happen, they're looking into it currently, maybe you see bigger banks coming into the market again, maybe they do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 email@example.com, 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.
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