It got little attention during the campaign, but housing finance is central to the economy, and the markets.
Even as some analysts believe the scars from the housing crisis helped lift Donald Trump to the presidency, the housing finance system was barely mentioned during the campaign. And contradictory messages from Trump himself about his priorities mean housing finance’s future remains murky.
One of the biggest drivers of the housing market, mortgage rates, isn’t something any presidential administration controls directly. But politics and fiscal policy influence the direction of rates very strongly.
Mortgage rates reflect investor sentiment about U.S. Treasury bonds as well as mortgage-backed securities. In the first days after the election, Treasurys have been trounced as investors expect a free-spending Trump presidency to stoke inflation much higher.
“If a president views the Fed chairman has been overly aggressive on keeping rates lower than they should be, there could be some influence there,” said David Stevens, president of the Mortgage Bankers Association.
Trump has said that he thinks the central bank has been keeping rates low because of political pressure from the White House to keep the economy looking stronger than it is. Rates have been artificially so low for so long that when the central bank does raise rates, “you’re going to see some very bad things happen.”
Mortgage rates have risen slightly in the days since the election, Stevens said, “but that was sort of just market volatility and will normalize itself in the days ahead. Unless of course President Trump signaled a change in commitment behind mortgage-backed securities.”
While that sounds far-fetched, it’s worth remembering that candidate Trump suggested the U.S. default on its debt.
Trulia Chief Economist Ralph McLaughlin thinks rates will bounce around a bit for a few months as markets adjust to the new president, but generally continue to head up. Trump will have to make his policies and priorities “more transparent,” McLaughlin said, or risk even higher rates from uncertainty in the market.
In the short term, though, mortgage servicers and lenders may profit from a surge of people rushing to refinance before rates go too high, McLaughlin thinks.
Trump has also signaled that he wants to cut Washington regulations that are holding back business growth. That’s a concern, McLaughlin told MarketWatch.
“The last time we had broad financial market deregulation we had reckless lending,” he said. “Deregulation is a priority of Trump’s but so is growing the U.S. economy further. What he needs to realize is that there is a healthy balance between the two. You don’t want lenders to be reckless but you do want them to make sustainable long-term investments in the economy.”
Again, it’s important to remember that candidate Trump admitted that he rooted for the housing crisis, calling it “business” and a good buying opportunity for him when people lost their homes.
Perhaps the biggest issue for housing finance is the future of Fannie Mae FNMA, +27.92% and Freddie Mac FMCC, +26.32% . Industry groups and analysts like MBA, not to mention the management of the two enterprises, have advocated for an overhaul of the conservatorship they’ve been in for eight years. “Conservatorship is highly politically risky, especially if they have to draw on a credit line,” Stevens said.
Finding a permanent solution for the two enterprises is “likely to be on President Trump’s agenda,” Stevens said, but not in the first two years, until after the president’s top priorities have been addressed. “That said, I do think stakeholders are going to be working closely with the next administration’s team to make sure they know how unstable this conservatorship is.”
Many Republicans have long been skeptical of the two enterprises, said Nela Richardson, chief economist for Redfin. “What we have in this new administration is for the first time in a very long time is a government that’s not divided. Given that they are in the same party there may be a political will to take on Fannie and Freddie and it could mean a dismantling of the two agencies and a privatization of both.”
House Financial Services Committee Chair Jeb Hensarling has also been critical of the Federal Housing Administration, Richardson pointed out.
Any big changes to any of the government agencies would buffet the housing market, Richardson said. “It would kill demand.”
But more than that, it would “be a dagger in the American Dream of the people who elected Trump,” she said. The government agencies are a tool “made for the Rust Belt,” where homes are less expensive than on the coasts and in big cities, Richardson added. “There’s a tension between what Trump voters would want and what the Republican platform would support.”