The Winds of Change – Trump Administration

Here is some interesting reading supplied to us in an article written by Jeff Jenson from The Federal Savings Bank. This is his interpretation of some facts he gathered regarding the effect of the upcoming Trump Administration on mortgages, housing and the financial markets.

We have just come out of a period through July of this year that saw low interest rates and low inflation. A small increase in the past couple months saw year over year inflation rise by 1.5%. Immediately after the election world markets traded wildly creating huge losses in most areas. Stock futures here raced down to the emergency stop level. As we know the U.S. markets stabilized the next morning. Short term interest rates including mortgage backed securities have risen sharply in the last few days. The mortgage backed securities (MBS bonds), which are the securities which directly determine conventional interest rates, slid over 250 basis point in just 4 sessions. This caused interest rates for 30 year loans in amounts of $417,000 or less to rise to 4.00%.

The bid question now is “What effect will the Trump presidency have on domestic policies”. Now that the executive branch and both elements of the legislative branch are controlled by the same party (for the first time in 10 years), Washington should be able to put new policies in place. Trump has shifted his sizable fiscal stimulus plan to be in line with Paul Ryan’s. These two powerful leaders should be able to stimulate growth in the range of 3% per quarter. Taxes will be cut for both individuals and corporations. Secular stagnation will end and the result will be higher inflation, higher interest rates and growth. There will likely be a large increase in defense spending and the Fed will let the economy run hot. Industries will be de-regulated. At the same time there will be an increase in protectionism. That will have the effect of bringing greater foreign investment to our shores as other nations race to place their capital here to avoid tariffs. The U.S. will have increased spending in NATO countries and in Asia. Financial and energy sectors should improve along with technology and large pharmaceuticals. Sensible immigration reform could also contribute to the economy by bringing in educated elements to the labor force. Global profits should increase, which would ill affect municipal bonds.

The effect of the Trump presidency on the housing industry should be vast. Initially plans to repeal Dodd-Frank would likely abolish the CFPB. Due to the broad level of restrictions the CFPB has created, the mortgage industry is basically bound and gagged. It would open up the lenders to possibly encourage more large lenders to return to the FHA program. Regulation reductions could reduce the costs of processing and underwriting loans and lower origination expenses and allow alternative lending to return. Large lenders could create better pricing on loans they would keep for themselves rather than selling them to secondary markets. The two principal agencies that purchase mortgages and bundle them for resale, Fannie Mae and Freddie Mac would likely be reorganized creating greater efficiency and easier access to funds. This could create greater liquidity and encourage home ownership and building communities as a means to improve the economy. In short, stayed tuned for a lot of change and improvement in the mortgage and real estate industries.