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1.26.2017 Why Trump Administration Could Benefit Private Student Lending
President Trump has already taken a number of actions during his first two weeks in office that will impact different sectors of the U.S. economy. One area where he hasn’t taken action yet is the $1.4 trillion student loan market — but anticipation of such action in the near future is causing excitement among private student lenders.
Since the election, shares of Sallie Mae, the largest private student lender, have soared by more than 50 percent. In a recent Wall Street Journal article, Sallie Mae’s CEO put it this way: “Political risk has now been removed. We can now deal with the facts as opposed to a nightmare.”
Sitting on the Sidelines
Under the Obama administration, the federal government took on origination of all federally backed student loans, pushing private lenders to the sidelines. The goal was to lower lending costs for the government, which would then allocate the savings to student grants and offsets to Obamacare costs.
Of course, the increased regulatory scrutiny on private lenders that arose with the formation of the Consumer Financial Protection Bureau (CFPB) also played a big role in the exodus of private lenders from the student loan market. Bank of America, Citigroup, J.P. Morgan Chase and U.S. Bank have all left the market since 2009.
In fact, the federal government’s share of outstanding student loan debt has increased since 2008 from about 88 percent to nearly 93 percent. Private student loans now account for less than 8 percent of outstanding student loan balances.
A drawback of the federal government dominating the student loan market is that taxpayers are ultimately liable for defaults. Making matters worse, the government made most of these loans without even checking borrowers’ credit scores.
Return of Private Lenders
One plank of the Republican Party platform was a return of private lenders “in order to bring down college costs and give students access to a multitude of financing options,” the platform stated. “The federal government should not be in the business of originating student loans,” according to the platform.
Less government regulation in student lending could lead to several possible outcomes, including more private student loans from the likes of Sallie Mae, Wells Fargo and Discover Financial Services, the three largest private student lenders. It could also entice more private lenders into the market. Or, it could lead to the federal government selling loans to private lenders or encouraging the emergence of a bond market for student loans.
Before the election, there was “a zero percent chance” of this happening, the CEO of a private student loan lender was quoted as saying in The Wall Street Journal article. “But now something like this has a possibility,” he said.
According to the CEO of Sallie Mae, if 20 percent of the federal student loan market (including certain loans to grad students and undergrad students’ parents) moved to the private market, private lenders would see a huge increase in student loan volume.
Benefitting from a Trump Administration
It remains to be seen, of course, exactly what the Trump administration will do in terms of relaxing regulations on private student lenders. And even if regulations are pared way back, the banks that bailed on private student lending might not rush back in right away.
Some like J.P. Morgan have already moved on from this market in search of other loan products than can help them attract younger customers. But one thing seems certain: You can add private student lending to the list of industries that will likely benefit from a Trump administration.
We’re interested in hearing from you. What do you think about the possible rejuvenation of the private student loan industry? Send me an email at email@example.com.
1.12.2017 How Many Americans Are Missing Out on the “Deal of a Lifetime”
One of the great ironies of the financial world post-recession is the fact that while mortgage interest rates have been at historic lows for the past few years, many Americans have been unable to get a mortgage loan and thus take advantage of these low rates.
This fact was the focus of a recent article in The Wall Street Journal that discussed how credit restrictions put in place by government regulators in the aftermath of the financial crisis have cost many Americans the opportunity for a “deal of a lifetime.” Credit is cheaper and more abundant than ever before for those with solid credit, the article notes. But it’s much harder to get for those without good credit or a stable income.
The Wrong Focus?
An entrepreneur interviewed in The Wall Street Journal article talked about how he shelved plans to start a new mortgage bank because regulatory hurdles would have erased his returns. He believes that regulators and policy makers have focused too heavily on “lowering the cost of capital instead of increasing the availability of credit.”
According to the article, lending for home purchases hit its highest level in nearly a decade during the second quarter of last year. But nearly all the growth in home mortgages came from borrowers with credit scores of 700 or higher. Borrowers with sub-700 credit scores accounted for just 15 percent of mortgage originations during this time, the lowest share since at least 2000.
Even Richard Cordray, the director of the Consumer Financial Protection Bureau (CFPB), has acknowledged the fact that not all borrowers have been able to take advantage of rock-bottom mortgage rates. “The market is not yet supporting access to credit for the full spectrum of creditworthy borrowers,” he said during a speech last October.
One mortgage industry insider put it this way in The Wall Street Journal article: “We are at a point when housing should be going gangbusters. It’s not going anywhere. The people with access to credit have become rich, and the people without access don’t even have a chance to climb up the ladder.”
Other data cited in the article sheds even more light on this dilemma. For example:
Spending on consumer durables like cars and appliances is 21 percent above pre-recession levels but residential real estate investment is 22 percent below pre-recession levels.
New home sales are currently running about 30 percent below the average between 1983 and 2007. In addition, new home sales are lower than every one of those years except during the recession of 1990-1991.
Construction of single-family homes has accounted for just 1 percent of GDP on average since 2009 after accounting for 2 percent of GDP on average during the 1990s.
Perhaps most telling of all, it’s estimated that up to 1.4 million Americans who would have been able to obtain a mortgage in 2002 would not be able to qualify for a mortgage today. Indeed, that’s a lot of people who are missing out on the mortgage “deal of a lifetime.”
Also, the lack of access to mortgage loans has a broader effect on the economy than just housing, the article points out. This is because when people buy homes, they also tend to spend money on things like furniture, appliances and other things associated with homeownership.
Homeownership Rate Also Sinking
Another irony is that the bifurcation that has occurred with mortgage lending — where borrowers with high credit scores can get mortgages easily while those with lower credit scores are often shut out — is leading to the opposite of what many policy makers were striving for a decade ago: Higher rates of homeownership in the U.S.
According to The Wall Street Journal article, the homeownership rate has fallen on a year-over-year basis in every quarter for the last decade. The homeownership rate now stands at a 50-year low due to a surge in renting caused in part by the inability of many potential homebuyers to land a mortgage.
President Trump campaigned heavily on a promise to peel back many burdensome government regulations, including scaling back or even eliminating the CFPB. It will be interesting to see how this plays out over the next few years — and whether it has an impact on credit availability.
We’re interested in hearing from you. What are your observations about credit availability in your marketplace? Send me an email at firstname.lastname@example.org.
1.5.2017 Will Mortgage Loan Activity Drop in 2017?
2016 was a banner year for the U.S. mortgage industry, with nearly $2 trillion in new loan originations. But with rising interest rates and continued home price appreciation, this volume could fall in 2017 and over the next few years.
So states a recent report from Kroll Bond Rating Agency, which believes 2016 will turn out to be “the peak in terms of lending volumes for years to come.”
Rising Interest Rates and Home Prices
The KBRA report attributes anticipated falling mortgage loan volume primarily to rising interest rates and rising home prices. Mortgage rates increased sharply after the election and the 30-year fixed rate is now back above 4% for the first time since 2015.
Of course, this is still a very attractive rate from a historical perspective — the average 30-year fixed mortgage rate for the past half-century is 8.26%, or double the current rate. But homebuyers have become accustomed to rock-bottom, sub-4% rates for so long that even this historically low rate looks high in comparison.
Higher interest rates will be especially damaging to refi activity, notes the report. It points out that the Mortgage Bankers Association is projecting a sharp decline in refi volume — from $263 billion in the fourth quarter of last year to just $145 billion in the first quarter of this year. The MBA predicts a 50 percent reduction in refi volume for the entire year.
Meanwhile, the MBA projects that the volume of mortgages to purchase homes will rise to $1.1 trillion this year. But the sharp drop-off in refi activity is going to lead to an overall decline in mortgage origination volumes of 20% this year, according to the KBRA report.
Refis are more directly affected by rising rates than purchase mortgages. However, acquiring purchase mortgage customers is “a more complex and expensive process than refinancing an existing mortgage,” the report states.
By the way, the KBRA report doesn’t believe that the recent increase in the conforming loan limit for Fannie Mae and Freddie Mac for the first time in 10 years will have nearly as much impact on mortgage loan origination as rising interest rates and home prices. “Mortgage lending volume is about interest rates first and foremost,” the report states.
Rising Home Prices
As for the other component in the equation — continued home price appreciation — home prices in the U.S. recently surpassed all-time highs set nearly a decade ago, before the real estate crash.
The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. census divisions, has risen steadily since bottoming out in February of 2012 at 134.01. In October, it rose to 185.06, topping the previous record high of 184.21 set in September of 2006.
The KBRA report sums up its mortgage lending forecast this way: “Given the regulatory environment and rising trend in interest rates, KBRA believes that lending volumes for both insured depositories and non-bank lenders are likely to fall in 2017 and beyond as relatively lucrative refinancing volumes dry up.”
We’re interested in hearing from you. What’s your outlook for mortgage lending this year? Send me an email at email@example.com.
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