Election Day 2016 is Over – Now What?

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Rob Chrisman's Perspectives

The 2016 election is over, but the new administration is just beginning. For attorneys, it has the potential to impact future generations in a way not seen since Richard Nixon appointed four justices after his 1968 election. But lenders are more focused on the regulatory environment, having seen the cost per loan of compliance increase dramatically in the last 4-6 years. But now it is rumored that lobbyists are in talks with Trump’s transition team about how they could de-fang regulators, put an end to onerous enforcement actions, and stop prosecutors from using the Fair Claims Act. What else is happening?

Wells Fargo & Co. climbed for two straight days, moving back to where its stock price was prior to its recent down turn. But most, if not all, publicly-held bank stocks rallied as investors bet that a Trump presidency will lead to less regulation and sideline some of the industry’s sharpest critics. Wells, for example, has climbed 11 percent since Donald Trump’s victory on Tuesday, the best two-day rally in seven years. The shares have recouped all their declines since Sept. 8, when the lender announced a settlement with regulators.

Despite their current corporate structure, the price of Fannie Mae and Freddie Mac has shot up. Investors continued to bid up the share of Fannie Mae and Freddie Mac common, thanks to the perception that a Trump White House may push for a recap and release program for the two.
The two have been in conservatorship since the fall of 2008. The stocks are in the $2 range, a far cry from the $60 per share atmosphere from many years ago. But over the past year, both have traded as low as 98 cents.

What gives? There is this belief that the regulatory process is going to become much less onerous under Trump. The Trump administration has the chance to decriminalize immaterial violations regulation and foot-faults to allow lenders to remove credit overlays and leverage government lending programs to their fullest and intended public policy purpose to benefit qualified home buyers. The President-elect, however, should have a freer hand to shape policy than has been the case for President Obama, since Republicans also will retain control of the House and Senate.

There is talk that at a minimum the CFPB will be restructured, moving from a single director to a committee, and with more direct Congressional oversight. There may be more focus on programs and less focus on enforcement activity.

The big issue facing the lending & housing industry is regulation. (Yes, there are shortages of skilled labor, and a lack of buildable land, but there is still plenty of activity in the urban cores.) Trump is on record as saying that there is no group regulated harder than the housing industry. Trump said these regulations kill not just the small businesses but jobs in general. Trump shared that he plans to eliminate these regulations and instead implement a method of creating jobs without regulation.

And in an interview with Reuters in May, Trump said he plans to overhaul the controversial Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed in 2010 in response to the crisis. “Dodd-Frank has made it impossible for bankers to function,” said Trump. “It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop.”

A hard look at the current regulatory environment is only piece of the pie for STRATMOR’s clients. Donald Trump’s victory over Hillary Clinton in the presidential election has raised doubts that the Fed will follow through with an interest-rate hike next month. But the bond market has raised rates without the Federal Reserve’s Open Market Committee doing anything. The yield on the benchmark 10-year T-note have moved above 2% for the first time all year.

Jobs and housing drive the economy, and the key to a full recovery in the housing market depends on the economy. If a Trump Administration creates more jobs and better wages, this will drive household formation and homeownership.

And lenders are also watching housing policy. Throughout the campaign, Mr. Trump said little about housing policy and the reform of the government-sponsored enterprises Fannie Mae and Freddie Mac. Harken back to previous elections when housing was the talk of the campaigns. Some argue, rightfully so, that there are more pressing matters. Without a crisis, there is little incentive for him to move quickly on the issue.

But what about Fannie Mae and Freddie Mac? These two geese, laying golden eggs for the Federal Government every quarter, have both in conservatorship since before Barack Obama’s election and are expected to garner attention during the future Trump administration. In general Republicans are in favor of less government in housing whereas Democrats believe that government’s role in housing should be ample and often. Both agencies continued to function, as did lenders originating their loans, all through the last down cycle.

So, what is the right role for government in housing? We can expect to see legislative action, but as noted above we are not in a crisis mode and therefore little need to rush. Many believe that in the long run a Trump presidency will be good for the housing and mortgage markets. If there is regulatory relief for the financial services industry, this in turn could very well lead to more credit made available to average homebuyers who have been locked out of the market by today’s extraordinarily tight credit standards.