The chorus is getting louder from the stakeholders in the consumer finance and housing industries for legislative, executive or judicial re-structuring of the CFPB, so the CFPB probably thinks it has it pretty tough right now.
As challenging as the current environment may seem to the CFPB, it has yet to truly feel the sound and the fury from the entire housing industry. But, that could change. The CFPB has been an indirect beneficiary of low mortgage rates and an active housing market over the last few years. The housing industry has been too busy to focus 100% of its attention on the regulatory overreach that has occurred over the past few years in both the origination and servicing side of the mortgage business.
THE BIG UNWIND
What happens, though, when the industry feels the effects of the Big Unwind? In case you missed it, we own $4.5 trillion in US treasuries and mortgage-backed securities (MBS) issued by Fannie, Freddie and Ginnie, as the Fed went on a buying spree starting in late 2008 when the balance sheet was a mere $500 billion. The idea was to keep the 30-year fixed interest rate artificially low, so that Americans would buy houses, and the 64% of us who own a home would see our home values and equity increase. This, in turn, would boost our confidence so we would buy iPhones and other products resulting in Corporate America hiring workers which, in turn, would reduce the unemployment rate. The good news is that the Fed's $4 trillion juicing worked as unemployment is under 5% and the Commerce Department recently upwardly revised its second quarter GDP number to 3%.
NOW THE HARD PART
The Fed needs to “unwind” its balance sheet in order to return to normal monetary policy. The Fed's plan is, by year end or early 2018, to stop purchasing GSE and Ginnie bonds once they mature. The idea, and the hope, is that through a very methodical and telegraphed unwind over the next 18 to 24 months, there will be enough institutional investors to sop up and purchase all the MBS that the Fed was purchasing so that the 30-year fixed rate only goes up, say 50 or 100 basis points. But what if the Fed is wrong, and there is not huge demand for GSE and Ginnie product? Of course, the Fed could always start purchasing MBS again, but there would be serious consequences to such capitulation. If demand doesn't meet supply, the 30-year fixed will rise.
If the 30-year fixed sees a 200 to 250 basis point climb over the next two years, refis, which according to the MBA currently account for approximately 35% of originations, will fall off a cliff. Additionally, homeowners with ARM loans will see their monthly payments spike when their loans reset. The mortgage market will feel a lot like 1994 when Greesnspan took away the punch bowl resulting in the 30-year fixed hitting 9%. So, how is this relevant to the CFPB? If housing gets choked by the Big Unwind, the housing, construction and real estate stakeholders will demand that Washington “do something” to help spur home buying.
The extremely burdensome regulations imposed by the CFPB will be an easy target. Unnecessary compliance costs, whether on the origination or servicing side, absolutely affect loan pricing. The executive or legislative branch, or both, will, for example, force the CFPB to re-think all the unnecessary burdens it has placed on the loan closing process that are not only costly but also dissatisfying to the consumer. On the servicing side, there will be intense pressure on the CFPB to justify why servicers are required to send dozens of letters and make dozens of calls to delinquent borrowers notifying them that they should try to avoid foreclosure. These regulations, by design, have resulted in it taking over two years in most states to foreclose a defaulted mortgage. Compliance costs and the costs associated with servicing and holding a non-performing asset for two years absolutely affect loan pricing and mortgage rates. The housing industry and its powerful voice will not put up with it.
With respect to the Big Unwind, our economy and country are navigating unchartered waters, and there will be many unforeseen consequences. One such consequence may be regime change at the CFPB.