With the stunning political setback dealt to the Democratic Party in yesterday's general election, the list of things that are going to be altered in Washington in terms of regulation of financial markets is very long. The
This Trump team is far better organized than in Trump I and is already vetting Cabinet appointments. One insider told NMN before the election that once the election is decided, the transition will begin in earnest. Major appointments will be announced and the outlines of an agenda will emerge, but a big part of the Trump effort in year one will be rolling back years of progressive policy.
Senator Tim Scott R-SC, a top Trump ally, is poised to be the next chair of the Banking Committee with the defeat of progressive Democrat Sherrod Brown, D-Ohio. Eleanor Mueller of Politico notes that "Scott is finalizing an agenda that's rooted in deregulation."
In terms of dismantling the administrative state, President Trump is likely to sign the revisions to
The revisions to EO 12866 will compel all federal agencies to "report up" to the White House and the Office of Management & Budget on initiatives that are not specifically authorized by Congress. Many of the policy initiatives taken during the Biden Administration at agencies such as Ginnie Mae, the Federal Housing Finance Agency and Consumer Financial Protection Bureau will be rescinded.
So, for example, the Federal Reserve Board has specific instructions from Congress regarding monetary policy, but not on bank regulation. Officials at the Fed and other agencies will be compelled to coordinate policy actions with the White House. The capital rules promulgated by the FHFA and Ginnie Mae for nonbanks, for example, which have no statutory basis, will likewise be rolled back or eliminated entirely.
In addition, Trump is likely to use another Executive Order he signed in October 2020, "
"Pursuant to my authority under section 3302(1) of title 5, United States Code," President Trump declared in 2020, "I find that conditions of good administration make necessary an exception to the competitive hiring rules and examinations for career positions in the Federal service of a confidential, policy-determining, policy-making, or policy-advocating character." This means that all of the career officials at FHFA, HUD and Ginnie Mae who tormented the mortgage industry during the Biden years can be severed from government service.
While Trump is leading his conservative counter-revolution in Washington, the financial markets are trying to decide whether the election is good or bad for interest rates and inflation. The 10-year Treasury note is close to 4.5% yield or almost a full point above yields after the rate cut in September. Meanwhile, the par contract for to-be-announced Fannie Mae contracts for November is a 6% coupon.
In the near term, any benefit of the Trump victory in terms of reigning in the excesses of federal regulatory agencies will be muted as mortgage lenders navigate a rising interest rate market. Wholesale channel leaders such as United Wholesale Mortgage and Rocket, who expected a bull market a month ago, now will likely be forced to sell more servicing assets to offset losses in the secondary market.
The good news, of course, is that rising interest rates boost the value of mortgage servicing rights, even as lending volumes fall for both refinance and purchase loans. In September, lenders were writing VA refinance loans in the low 5s, but today that same market is running a point higher. Is this an overreaction or a new trading range for Treasury bonds and MBS? We'll see.
Fratantoni notes that at this time of year, purchase volume is typically pretty anemic, so the week to week swings don't amount to much. After Thanksgiving, activity really grinds to a halt in most markets. "I would expect continuing declines in refi activity, modest headwind to the seasonally low purchase volume," he notes.
Most analysts expect Fed Chairman Jerome Powell and perhaps other governors to depart the board of the central bank with the Trump victory, but some of the policy changes at the Fed may have nothing to do with personalities and may be a big challenge to the residential mortgage market.
Last week,
At the end of his piece, Nelson suggests that the Fed may be considering sales of MBS. Why? Because the portion of the System Open Market Account portfolio that is in MBS is now rising as Treasury paper runs off. This is contrary to the public statements by Chairman Powell and other FOMC members that the Committee would like to return to owning primarily Treasury securities.
In June of 2022, we asked in The Institutional Risk Analyst ("
Obviously with residential mortgage rates near 7% again, nobody in Washington or on Wall Street wants to see the Fed making outright sales of MBS into a retreating secondary market. But the Fed can use the power of wide spreads,
In the medium term, the mortgage industry and financials generally should see some substantial benefits from the end of Democratic misrule in Washington. In the meantime, however, market concerns about inflation and the direction of LT interest rates could play havoc on lenders and traders. Until the Trump Administration makes clear that it is focused on reducing the federal deficit, markets are likely to remain volatile.
Yet if President Trump and his loyal boy wonder, Elon Musk, make progress cutting the federal deficit, then the likelihood is for interest rates to fall even as the dollar soars. The global bid for dollars and, more important, risk free Treasury collateral is so strong that a sudden reduction in new debt issuance by the Treasury will cause interest rates to fall sharply – certainly good news for mortgage lenders.