Tom Rhodes is the CEO of Austin-based lender Sente Mortgage, and a past president of the Texas Mortgage Bankers Association.
In our conversation with the long-time lender, we discussed what housing will look like under President Trump, Housing Secretary Carson and Treasury Secretary Mnuchin, and what role real estate agents should play in financial education.
Chicago Agent (CA): How much of the recent mortgage rate spike has to do with Donald Trump’s election, and do you believe the rise will extend into his presidency?
Tom Rhodes (TR): It is 100 percent Trump. It is a recognition by the market that Trump’s policies, to the extent that people know what they are, will create more growth. Because with speculation of growth comes speculation of inflation, and with that rates rise. It’s 100 percent connected to Trump.
The challenge then becomes what else is happening in the world. Italy just denied constitutional reforms. In Austria, voters rejected their far-right candidate. The instability in the world will continue to play heavily on rates, because the safer and more sound we are compared to the rest of the world, the more confidence people are going to have in our market.
I think Trump’s policies will create a gentle pressure in an ongoing increase in rates, but global pressures can easily knock those back or push them more rapidly forward.
Also, we look at 4 percent rates as being extraordinarily low in the history of rates, and so we expect growth there; but still, I don’t see anything radical happening that will push people out of the market.
CA: You don’t believe these relatively high rates will dissuade Millennials from entering the market?
TR: When rates get out of sync with what people come to expect, there is a pause. So when we do have sudden movement upwards, and it’s inconsistent with expectations (i.e., people expecting something in the 3 percent range, and now it is in the 4 percent range), it leads a lot of consumers to believe that if they just wait, the rate will go back down. And moving from 3 to 4 percent is a particularly important threshold to cross.
Also, the housing market is tied to growth and jobs. Near the end of 2016, we had an excellent job report. If job growth continues on that strong pace, the pause we might see from higher mortgage rates is unlikely to last for very long.
CA: What do you think of Ben Carson as a pick for Housing Secretary, and what will be the big problems facing him as he heads to Capitol Hill?
TR: We know very little about Carson around policies. He’s written a few editorials over the years, and we know he sees the federal government as overreaching and wants to empower the states. Interestingly enough, the situation with HUD as it relates to housing is healthier than it has been in a while. One of the primary duties of HUD is to oversee the FHA, which has the low-downpayment mortgage opportunity for low-income and low-credit-scores homebuyers. It plays a critical role in housing. But one of the challenges the FHA has faced over the last several years has been that it’s fund – a reserve fund for defaults, foreclosures, etc. – has gotten healthy again, and because of that, there has been pressure to lower insurance rates. I think Carson will see an opportunity to lower insurance rates for the FHA, which would lower the costs of an FHA mortgage. That could be pretty positive.
There are many policies the current administration has done around affirmatively promoting fair housing. And speculating from what I’ve heard out of Carson, that’s likely to change. Policy wise, you’ll see a lot of changes from HUD. And part of that is you’ll probably see the department stepping out of the market. I think the bigger story for housing will be what the Treasury Sectary does. Housing finance reform will play a much bigger role in the future of the housing market.
CA: On that point, what do you think would be the ramifications of privatizing, or even getting rid of, Fannie Mae and Freddie Mac, as well as removing the mortgage interest rate deduction?
TR: Everything about this Trump presidency is challenging the way we’ve done things for a very long time, and markets do not like that. And we’re being challenged on the housing market, as well. The mortgage interest deduction is a “holy cow” in housing. If it were removed, the immediate reaction would be a pause in homebuying, because everyone would feel its loss.
However, it is done in conjunction with significant tax reform. If it’s closing a year and nothing else changes, I think you’ll see a multi-year shift in housing, in which people get used to the new system. Now, if the deductions end alongside a restructuring of taxes, the impact will be shorter. But regardless of how it’s done, I think ending the deduction will be met with quite a bit of resistance.
What is going to be much more on the table is what they do with Fannie and Freddie. And there are two options: one is getting rid of them, and the other is returning them to the private sector – the views of Jeb Hensarling and Steve Mnuchin, respectively. There is a massive difference between those two routes. If you dismantle them, you lose the infrastructure, technology and the processes of the housing market. It would be like if the government privatized energy utilities but dismantled all the power plants before turning it over. There would be a huge gap in getting things running again. In 20 years, private industry could probably replace it, but in the short term, you’ve lost a critical piece of infrastructure. Fannie and Freddie are that critical piece. There is nothing already in the private market that could immediately replace them. So getting rid of Fannie and Freddie is potentially disastrous.
But if you go Mnuchin’s route, I think that’s very viable. Fannie and Freddie are both strong entities, with good infrastructure and technology. They’re now leveraging big data to help identify and prevent problems that plagued them in the past. The problem, though, is they’re giving so much money to the Treasury. And so privatizing them means the government loses those billions of dollars.