The upcoming 2024 U.S. presidential election is poised to significantly influence both the economic landscape of Washington and the broader global market. U.S. presidents have traditionally embraced the idea of home ownership as a cornerstone of the American dream, a notion that resonates especially with Republican leaders. Former President Donald Trump has echoed this sentiment throughout his political career, promoting policies aimed at enhancing home ownership among Americans.

However, recent developments in Trump's policy-making — particularly his controversial approach to global trade — raise concerns about potential repercussions, including increased unemployment, inflation, and overall economic hardship for U.S. consumers. Given these factors, one might anticipate a downturn in the housing market, as well as in the mortgage market that supports it. Surprisingly, the opposite effect seems to be occurring in the short term.

The recent implementation of tariffs by Trump has sent shockwaves through international markets and unsettled global leaders. This uncertainty has led to a notable flight of capital towards safety, with many investors choosing to divert their funds into U.S. Treasury bonds, despite these bonds being issued by the government at the heart of the crisis. This unusual reaction has resulted in a decrease in U.S. Treasury yields, with the yield on 10-year bonds dropping to below 4 percent, down from a high of 4.8 percent in January. As a direct consequence, mortgage rates, which are often linked to these Treasury yields, have also decreased.

Interestingly, amid this turbulent climate, certain lenders are exhibiting a sense of optimism. Rocket Mortgage, a prominent name in the lending industry that brands itself as “the world’s most optimistic company,” recently announced a substantial acquisition of its rival Mr. Cooper for $9.4 billion. This move reflects a broader bullish sentiment within the mortgage sector, despite the backdrop of declining U.S. equity markets following Trump’s tariff announcements. In fact, Rocket's stock has surged approximately 20 percent since the beginning of last week, positioning it more like a technology firm due to its AI-enhanced digital platform, rather than a conventional lender.

Yet, the mortgage market is not without its challenges. The rates of combined foreclosures and delinquencies have begun to creep upward. Currently, these rates remain below 2 percent, well below the 5 percent peak observed during the COVID-19 pandemic and the 10 percent levels that followed the 2008 global financial crisis. Nevertheless, the deteriorating economic forecasts for the U.S. suggest that rising interest rates may be on the horizon, as policymakers may feel compelled to act against mounting inflation.

A critical factor to consider is that many of the leading mortgage lenders today are increasingly reliant on junk-rated paper for their funding. While Rocket enjoys a positive investment-grade rating from Fitch, it is important to note that this rating has recently been placed on negative watch due to the additional leverage it will take on from the Mr. Cooper acquisition. The traditional reliance on deposit funding has been undermined by the withdrawal runs that have plagued the financial sector since the 2008 crisis and most recently contributed to the downfall of Silicon Valley Bank in 2023. If access to the bond market becomes prohibitively expensive, it could create significant challenges for the mortgage market moving forward.

The regulatory environment offers little in terms of reassurance. Today's dominant lenders, including Rocket and United Wholesale Mortgage, are characterized by relatively low capitalization, benefiting from a regulatory framework that is less stringent for non-bank entities compared to the more rigorous capital requirements imposed on traditional banks following the financial crisis.

Despite these issues, the mortgage market remains relatively low-risk compared to other forms of consumer lending. Mortgages are typically backed by the intrinsic value of physical property, which provides a safety net. This is particularly true in the U.S., where credit risk does not linger on lenders' balance sheets for long periods. The vast majority of mortgage assets are repackaged into mortgage-backed securities (MBS); Rocket claims its securitization process is notably efficient, with many loans remaining on its balance sheet for only a week or two.

The real risk, in this case, is transferred to investors involved in MBS products, which primarily include large banks and insurance companies. Fortunately, many of these products are also de-risked due to government guarantees on “agency” MBS that are backed by entities such as Freddie Mac, Fannie Mae, and Ginnie Mae.

Looking back to 2008, the emergence of high-return securitizations attracted investors' attention, leading to the creation of non-agency, higher-yielding MBS products. This trend fueled a surge in poor-quality mortgage lending as the market attempted to satisfy investor demand, culminating in a catastrophic market collapse. Today, there is a renewed interest in higher-risk non-agency MBS, with issuance levels reaching their highest since 2008. However, at just 8.4 percent of the total, this figure pales in comparison to the over 50 percent observed before the last crisis.

In conclusion, it is evident that the U.S. government is now underpinning, either directly or indirectly, over 90 percent of mortgage risk in the country. The structure of the U.S. home loan market, a vital component of the American dream, faces uncertainty due to Trump's economic policies. However, it is essential to recognize that this situation diverges significantly from the ideals of small government traditionally espoused by Republican presidents throughout history.