Preview Of New Consumer Protection Agency, Preview of Fed Announcement Tomorrow
Preview Of New Consumer Protection Agency
One of the primary provisions is the introduction of a new federal consumer protection regulatory function housed within the Federal Reserve – the Consumer Financial Protection Bureau (CFPB). The CFPB is going to be huge – who is going to regulate the regulator? The CFPB will have broad powers to regulate, examine and enforce the Home Mortgage Disclosure Act (HMDA), Home Ownership and Equity Protection Act (HOEPA), Real Estate Settlement Procedures Act (RESPA), S.A.F.E. Mortgage Licensing Act, Truth-in-Lending Act (TILA), Financial Reform Act, the Alternative Mortgage Transactions Parity Act, Equal Credit Opportunity Act, most of the Fair Credit Reporting Act, Fair Debt Collections Practices Act, portions of the Gramm-Leach-Bliley Act, etc. The CFPB is supposed to be fully operational in July, at which point consumer financial protection functions (like the Fed, or HUD) will be transferred. But existing federal agencies may continue to monitor or issue proposed or final regulations up until July – like the new TIL payment disclosure change at the end of January, or the new loan originator compensation rules that are effective for applications taken on and after April 1.
It will be interesting to see how the government dictates risk profiles and analysis to lenders. Of course, keeping the consumer safe is one of its key missions – many argue that the CFPB is not there to help lenders. All lenders will be required to confirm borrowers’ ability to repay their loans, mostly using verified income sources. Many expect that new disclosures will be required that provide the borrower with more information about the economics associated with their loan such as total loan costs, mortgage originator compensation and information about increases in the interest rate and payments over the life of the loan. The CFPB may dabble in improved protections for borrowers with high-cost mortgages including new limits on fees and penalties, further regulating mortgage loan originator compensation, limiting prepayment penalties, or instituting certain lender protections for mortgages that do not have risky features or mortgage origination fees in excess of 3% of the loan amount.
Preview of Fed Meeting Announcement Tomorrow
Perhaps more importantly, today is the beginning of the Federal Open Market Committee Meeting, with the announcement coming tomorrow. They’ve already purchased $1.7 trillion of Treasury securities and MBS’s. After their announcement, and over the next several months, rates will go up, go down, or stay the same – no surprise there. What most lenders are concerned with is whether or not credit conditions will ease – rates are certainly low enough, and banks certainly have enough cash. If QEII results in that, then fine. This QE2 asset purchasing is generally viewed as bad for the dollar, because the Fed would be essentially printing money to pay for the long-term bonds it plans to buy. Investors who want the dollar to rally are hoping for one of two options; either the Fed says it plans to buy fewer bonds than speculated, or the program rolls out slowly. The concerns focus on the amount of Treasury buying expected and the belief that it will not be much and will be spread over a long period of time, which will have little effect on lowering long-term interest rates. But in general the Fed will be walking a fine line of too little easing (the act is wasted) and too much easing (interest rates may not decline due to inflation fears).
Economics commentator Caroline Baum wrote about QEII yesterday, “The Fed embarks on this program with the intention of lowering yields on long-term Treasuries, which in turn will bring down mortgage rates and corporate bond yields. Surely there must be two or three households holding back on a home purchase because the 30-year mortgage rate at 4.2 percent is too onerous…Either the Fed is operating under a misconception about how QE2 will reduce unemployment and raise inflation, or it has failed to communicate the transmission mechanism to the public. Neither is a plus. About the best thing anyone can say about the well-advertised and anticipated QE2 is that it won’t do much good. The worst thing is that it will inflate asset prices, which we don’t call inflation.”
On the same topic a Bank of America/Merrill Lynch trader wrote, “The Fed is the only game in town. Fiscal policy will not be forthcoming, as such, so the Fed will use every tool in the kit to achieve their aims. The Fed wants inflation; therefore, we will eventually have inflation. The language may be “worry of deflation”, but it will be “student body right” to inflate.”
Of course, after today’s election and tomorrow’s Fed policy statement, all attention will turn to the October employment report on Friday. With all of that, bonds are pretty quiet. The 10-yr yield is sitting around 2.61% and mortgages could be roughly unchanged from Monday’s close.