How will a Trump presidency impact the mortgage industry? For many, the obvious answer is that if Trump manages to grow the U.S. economy – whether through tax reform, increasing the number of jobs or, perhaps most importantly, boosting personal income – it could lead to a significant increase in home purchases due to pent-up demand.
But a more pressing issue for those in the industry is whether there will be a significant rollback of the onerous regulations that came to be as a result of the financial crisis. With the Republicans in full control of the House and Senate, will Trump replace the Dodd-Frank Act, as he has already pledged to do? If so, how quickly could that happen? Will this lead to the dissolution of the Consumer Financial Protection Bureau (CFPB) or a significant curtailment of its powers? And what of government-sponsored enterprise (GSE) reform?
MortgageOrb polled experts from across the industry to get their views on how a Trump presidency might bring about change in the months and years to come. Participating in this first round of emailed responses are Les Parker, CMB, senior vice president at LoanLogics; Kevin Wall, group president for First American Mortgage Solutions; Kevin Brungardt, CEO at RoundPoint Mortgage Servicing Corp.; David G. Kittle, CMB, vice chairman of The Mortgage Collaborative; and Dr. Rick Roque, managing director of mortgage banking, mergers and acquisitions, technology, and capital fundraising for MenloFinancial.
Q: According to President-Elect Trump’s website, “Great Again” (www.greatagain.gov), Trump plans to dismantle Dodd-Frank – which gave birth to the CFPB. It states that the “Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” In your opinion, how likely is it that Trump will completely replace the act as opposed to keeping certain sections of it intact?
Parker: The House has already provided the template written by Jeb Hensarling, chairman of the House Financial Services Committee, in the proposed Financial CHOICE Act. Hensarling is also liked by President-Elect Trump. Like the Affordable Care Act, regardless of whether it is repealed and replaced or repaired, Dodd-Frank will be substantially changed. The Trump political posture will be to eliminate the CFPB but use it as a bargaining chip to get it passed in the Senate.
Wall: Our desire is that any new legislation supports the progress being made to improve the consumer experience because we have to be able to meet the next generation’s expectations regarding quality and efficiency. As far as the potential impact on our industry, our view is those who take quality seriously using a consumer-centric approach should have less concern over how and when regulations evolve.
Brungardt: Bottom line, I think it is highly unlikely that a Trump administration will completely replace the Dodd-Frank Act. I think it is more likely that the Trump team will focus on quashing individual provisions that his party believes will dampen the performance of the banking and housing sectors. The Trump team recognizes those sectors must perform well for the U.S. economy at large to reach its full growth potential. The president-elect has already outlined some provisions his team deems intolerable, such as the Dodd-Frank, Title II provision that gives financial regulators the authority to take over a failing financial firm and liquidate it. They believe it is a mere loophole for a bailout and lacks accountability. I see a surge of proposed changes, as is typical in the new president’s honeymoon period of the first 180 days. However, I don’t see those changes being completely effectuated in the next 12 months.
Kittle: Dodd-Frank will be difficult to replace in its entirety. First, President-Elect Trump has not focused on housing throughout his campaign. Replacing Obamacare, immigration reform/securing our borders and tax reform will consume his first year in office – all heavy lifts. Parts of Dodd-Frank will be replaced, focusing on the onerous regulations implemented by the CFPB and including putting in place an oversight panel and replacing CFPB Director Richard Cordray’s overly aggressive management style.
Roque: The act itself will not be completely replaced; legislatively, it is easier to modify key provisions, and quite frankly, anti-steering provisions and capital requirements are not bad ideas – they are just onerous at the levels in place currently, and the lack of specificity in the oversight by the CFPB is the largest of issues.
Q: What do you think any new legislation replacing Dodd-Frank might look like – and what impact do you think this will have on the mortgage industry? What would a major rollback of the current regulations do to the industry in terms of operations?
Parker: Maybe the CFPB stands for “Constraint on Freedom to Purchase and Borrow.” It will be less of a constraint on commerce once the desired changes are effected. Smaller financial institutions will escape its regulatory stranglehold. The provisions in Dodd-Frank that address derivatives will stay largely in place. The capital rules will be strengthened, while giving all financial institutions more freedom to innovate. The independent mortgage bankers will probably see less relief than banks simply because of their capital structures. The TILA-RESPA Integrated Disclosures rule, the servicing rules and new reporting requirements under the Home Mortgage Disclosure Act (HMDA) will only change in terms of clarity, enforcement and implementation. The high priority of compliance and quality loan manufacturing will remain, but the reduced regulatory constraints will hasten the transformation of mortgage banking back offices to drive down the transaction cost of getting a loan to an end investor.
Kittle: This depends on who sponsors the reform inside the Senate. Any reduction in onerous regulation and a switch to a positive “work with the industry” attitude will go a long way to improving our industry. I don’t see a major rollback; however, to answer the question, it would increase overall profitability – as the overbearing burden of backroom compliance has severely impacted the small to midsize independent mortgage banker. I would caution every lender, should a rollback occur, to continue its focus on a compliant loan that will avoid any scrutiny for repurchase. This shift would also jar the vendor-compliance sector of our business – as millions have been invested to deliver the “perfect loan” sought by Dodd-Frank and the CFPB.
Roque: Dodd-Frank, if replaced or modified, is likely to address GSE reform; capital and retention requirements on servicers; net worth requirements on lenders seeking to attain their U.S. Department of Housing and Urban Development (HUD) approval; regulatory clarity; and the total cap on costs for lender-owned service providers, such as the 3.0% cap.
Q: What do you think replacing Dodd-Frank means for the future of the CFPB? Do you think the bureau will end up being abolished? Or will it live on in another form?
Parker: As much as I would like to see the CFPB go completely away, I think it will survive, but its power will be significantly curtailed in terms of a) leadership structure (it will no longer be a capricious organization, free to operate outside of transparent and traditional oversight) and mission (no more appeals of rulings/enforcement ultimately made by the director; of course, this just changed by court ruling, but it will get codified); c) budget (the bureau will come under congressional oversight and budget authority); and d) enforcement (its ability will be governable and less subjective to leadership’s whims).
Roque: The CFPB is unlikely to be dismantled, but its attitude and working relationship with industry associations and leaders will be softer, more respectful and specific regarding its examinations. I do not believe it will be abolished, as much as I’d like to say it would be, but it is likely to be significantly reduced in scope and influence on the housing markets. Its unilateral judgments, divorced from industry association feedback and feedback from HUD and the GSEs, are likely to end.
Q: How quickly do you think these changes might come about?
Parker: Because it constrains borrowers and many financial institutions – and because President-Elect Trump knows real estate – it will be a top priority. I would expect legislation by the summer.
Kittle: It’s a priority but not in the top five, so it will be awhile – but I would think before the midterm elections in 2018 while Republicans control both Houses of Congress.
Roque: The initial proposals will be made in the next six months; actual changes will likely take effect in the next 12 to 16 months.
Q: Will this lead to a major loosening of credit standards and the return of riskier lending, as some have predicted? (And, what of investors?)
Parker: It will not lead back to the abuses of the past. It will empower lenders to pursue more innovation to improve the consumer and investor experiences. It will help the private market restore the private-label securities market. The greatest obstacle removed by the new financial environment is codified underwriting. Its removal will enable investors to make credit decisions or offer guidelines that reflect changing risk assessments. The new world of mortgage banking is moving rapidly to a significantly different rep-and-warrant model. Fannie Mae’s “Day 1 Certainty” initiative is a step in the right direction and includes implementation of actuarially sound financial models. This should lift investor confidence. Quality will become the norm, not because of new government granular rules, but because of the clarity of rules around capital structure and risk assessment, much like the FASB 157 Guidelines for Fair Value Measurement.
Kittle: An ability to make a good credit decision based on verified documentation, underwriting, has been taken away over the past eight years by Dodd-Frank and the CFPB. Access to credit has been severely impacted by Dodd-Frank, so some loosening is to be expected. A return to riskier lending is probable; however, with an allowable risk-based pricing model, the markets and the American taxpayer can be adequately protected from another credit crisis. The credit-scoring model needs major adjustment. Lenders need the ability to look at more than just one model and include VantageScore in their decision-making process.
Roque: Yes, this will bolster public stocks in mortgage and housing markets and will free up capital constraints from investors looking for regulatory clarity in their capital investments in public or private mortgage companies. This will be a major boost for well-capitalized independent mortgage banks. This will affect less the depositories, given their oversight by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. This will boost the production volume of the independent mortgage banking channel.
Q: In what other ways do you see a Trump presidency potentially reshaping the housing and mortgage markets?
Parker: The cut in corporate income taxes and repatriation of capital and profits will provide sources of funds for a massive urban and rural renewal effort. I expect updated enterprise zones for smart manufacturing modeled after Rick Santorum proposals and original Jack Kemp plans. A significant investment by private enterprise, with public incentives to revitalize rural and urban areas where infrastructure lies dormant, will bring jobs to these economically depressed areas. Finally, the essentially repealed and replaced Affordable Care Act and reduced regulatory burden on the oil industry will enable entrepreneurs to go to these areas and provide “bread winner” jobs. The increase in jobs and gains in income will create exciting times for real estate and real estate financing.
Brungardt: I look at an individual’s history and experience to predict his or her future actions. At his core, the president-elect is a businessperson. As such, I think he fundamentally believes overregulation, a lack of accountability (e.g., bailouts), a lack of transparency and excessive taxes limit the potential of any economy. I expect he will focus on those areas. I think the equities and bond markets are having an initial positive reaction, especially as marked by the flight from safety to higher-yielding assets. This was a much more robust market when the mortgage coupons were higher.
Kittle: The Affordable Healthcare Act! I’ve been opining about this since 2010. The health of the first-time home buyer and millennials has been damaged by Obamacare. The increasing premiums and deductibles have been burdensome on this group, forcing a family decision: forced healthcare or saving for a car, children’s education or a home. They’re not buying homes, and replacing Obamacare with lower-cost healthcare will refocus this group on becoming homeowners!
Roque: GSE reform is highly unlikely until the second term of a Trump presidency. The present setup with the GSEs is stable, very profitable for the Treasury and working very effectively. The main areas of focus will be on risk retention, government housing programs and a moratorium on new rules yet to be implemented by Dodd-Frank – this could even possibly (not likely, but possibly) affect the yet-to-be-implemented HMDA reporting requirements. Areas to watch will be confidence in the new builder market, tax policy, new housing permits and starts, and, of course, a rapid rise in interest rates; for every 50 to 60 basis points, there is a 0.25% change in rate, with rates exceeding 4.0% (30-year) – we will see this likely to exceed 5.0% by the end of 2017, which will undercut refinance volume but bolster short-term, new purchase volume for on-the-fence buyers. Extended locks and concessions will cut into mortgage banking profits and undermine longer-time pipeline volume until new construction and housing inventory expands – likely to do so in 2019-2020. In 2017, mortgage volume is likely to dip lower than this year by 10% to 20% but rebound in 2018 and 2019, which will exceed 2016 production volumes.