How Trump's housing policies could reshape mortgages

Enjoy complimentary access to top ideas and insights — selected by our editors.

Uncertainty has replaced transitory as the new buzz work for American business, whether you talk tariffs, taxes or government mortgage finance. As a result, the mortgage industry was relieved when FHFA Director Bill Pulte told Diana Olick at CNBC that he is not considering a reduction in the conforming loan limit.

As the housing market grapples with economic headwinds and shifting political priorities, the mortgage industry is bracing for potential policy changes that could reshape lending, regulation, and risk management.

"There are no plans to do anything as it relates to the conforming loan limit," said Pulte. The limit for conventional loans currently stands at $806,500, an increase of $39,950 (or 5.2%) from 2024.

Why was this writer and many others in the industry worried about this potentially catastrophic eventuality? First, because conservatives in Washington have been talking about rolling back the GSEs for decades. As I discussed in a recent blog post in The Institutional Risk Analyst:

"When members of the mortgage industry ask what the Trump Administration intends for the GSEs, our response is simple: ask Peter Wallison at American Enterprise Institute (AEI). Back in 2018, Peter wrote an important paper that argued in favor of downsizing and even eliminating the GSEs via administrative action. The conventional loan limit would be reduced and the market above the cap would be turned into a private, bank only market that is not to-be-announced (TBA) eligible. That is, conventional loans would no longer be risk-free assets guaranteed by Uncle Sam."

Now, it goes without saying that the mortgage industry has not historically spent a lot of time cultivating relationships with conservatives in Washington. With the election of President Donald Trump, however, conservative views of the GSEs and mortgage finance more generally have surged back to the fore. Welcome to Trump II.

For example, Rep. Andy Barr (R-KY), who chairs the House Financial Services Subcommittee on Financial Institutions, called the CFPB under the Biden administration and former Director Rohit Chopra an "Orwellian predator," Claire Williams reports. There reportedly are many lenders that negotiated extortionate settlements with Chopra's CFPB under the administration of President Joe Biden that are now seeking to have these CFPB orders rescinded. 

But the second, larger reason for intense industry concern about a cut in the conforming loan limit is a softening in the economy and weakness in the upper end of the real estate market. There is a growing backlog of unsold single family homes above the national average of around $400k. 

"It's been almost 18 years since the start of the last housing crisis and a majority of Americans believe one is on the horizon, a Clever Real Estate survey found," Brad Finkelstein reported. 

"The builders are not selling homes, they are renting them," notes a retired Goldman Sachs banker who lives in southern Virginia. "Huge apartment complexes are going up everywhere. The towns and counties are allowing investors to build enormous projects, but there is not the demand to clear it. Couple of recent sales have fallen through. This happened in 2008. Everyone felt house rich and then it collapsed."

Because of the growing overhang in higher-priced single-family and also multifamily developments, investors are starting to reduce exposure to financials and related stocks. Meanwhile, headcount reductions at HUD and the FHFA are seen in the industry as portends of a reduction in capacity to do new business, both in terms of new loans and also the resolution of a growing pile of distressed assets. 

Given deteriorating market conditions, Director Pulte's comments were most welcome, especially given the relative dearth of public information available on Trump housing policy. Behind the scenes, however, there is a recognition that things are changing compared to the years of easy money and massive deficits during the Biden years. 

Housing goals from the Trump Administration

Several themes are emerging in the Trump administration, however, that are important for the housing finance industry and investors.

• First, the inclination of the Trump team seems to be focusing on a narrow list of priorities and leaving other possibilities for later. The possible "reform" or release of the GSEs, Fannie Mae and Freddie Mac, does not seem to be on the list of top 25 priorities. First there is no problem to fix. Second, administrative action to reduce "risk" and thus the footprint at the GSEs is the priority. And third, the income from the GSEs is an important source of revenue to support Republican tax-cuts.  Bottom line: GSE release is not on the table right now.

• Second, whereas Treasury Secretary Janet Yellen and progressives in the Biden Administration spent much of their time fretting needlessly about the systemic implications of nonbank mortgage servicing firms, the Trump team is more likely to rebalance the equation in favor of focusing real risks from banks, complex funds and financial firms. The states which actually regulate the nonbanks, one insider tells NMN, will be given primary responsibility for oversight of independent mortgage firms. 

• Lastly, as part of a reform of the GSEs and also HUD, all "mission" lending will apparently be confined to the FHA/VA/USDA market, while the GSEs will serve the more traditional conventional borrower. Given the growing list of program changes already implemented by Director Pulte at the FHFA, we'd expect all of the failed efforts by the Biden Administration to use the GSEs to promote low income lending to end. Likewise, the credit risk transfers by the GSEs ought to be ended as well. Current CRT pricing and high attachment points make no sense at all.  

It needs to be said the most diligent loan officers in the mortgage industry will direct low-income, high-LTV borrowers to the FHA market because that is where the best execution for the consumer is almost always found. The absurd Washington political narrative that says that the GSEs, which price loans based upon credit score and LTV, can be meaningful to low-income borrowers is more progressive fantasy than market reality. The FHA, on the other hand, does not risk-price loans. 
Even if Director Pulte rolls back ill-considered the loan level pricing adjustments made by his predecessor at FHFA, the FHA market is still going to be the best execution for most low-income borrowers. But as the US economy slows in coming months and the cost of credit rises, the GSEs will discover that some of those relatively low income borrowers who migrated to the conventional market as home prices rose dramatically over the past five years will now default or migrate back to the FHA market as home prices correct. 

During the past four years of COVID, ultra-low interest rates, and aggressive fiscal policy by the Biden Administration, the economy benefited from vast excess cash flows. These monetary and fiscal flows tended to overstate the true level of economic growth and employment, while suppressing the visible cost of credit defaults. 

Now these factors are being reversed as the Trump Administration seeks to shrink the public sector. And the Fed is backing away from any interest rate cuts in 2025, meaning that this will indeed be a year of uncertainty. Do Bill Pulte and the other confidants of President Trump understand what is going to happen in housing this year and next?