SMITH BRAIN TRUST — What might a Trump presidency mean for U.S. home values? Much of the analysis and news coverage since the election has been centered on what Donald Trump’s stint in the White House might mean for U.S. trade deals, foreign policy, the tax code and Obamacare. But what will it mean for the housing market to have a real-estate-mogul-turned-politician seated in the Oval Office?
Likely, not much — at least, not at first, say experts from the University of Maryland’s Robert H. Smith School of Business. “In the big picture, I would not look for a lot of movement in housing policy in this first year,” says Clifford Rossi, Smith School professor of the practice in finance and executive-in-residence. “That’s not because housing isn’t important to the administration, it’s just that they are going to have to pick and choose their priorities very carefully in this first year.”
But if Trump and congressional Republicans do pursue any kind of financial regulation reform in that first year, Rossi says, it’s likely to be aimed at the Dodd-Frank Wall Street Reform and Consumer Protection Act. Other priorities, he says, such as much-touted reform plans for Fannie Mae and Freddie Mac, will likely have to wait a year or more.
Congressional Republicans and the president-elect pushed the overhaul of Dodd-Frank as a major point during the long campaign season. And the drive for an overhaul isn’t going away.
Still, “despite the stark tones of the campaign, it is unlikely Dodd-Frank will be amended dramatically,” says Francesco D’Acunto, assistant professor of finance at the Smith School. For example, the portions of the law that pertain to financial institutions’ risk management and the regulation of shadow banking will likely remain largely intact. But Title XIV, which regulates the mortgage market, could be in for a full-scale renovation that might ultimately improve the fortunes of potential homebuyers from the middle class.
D’Acunto and Smith School assistant professor Alberto Rossi, in recent research, showed how, in the wake of Dodd-Frank banks decreased mortgage lending to middle-class households by about 15 percent, and increased lending to the top of the income distribution by about 20 percent.
“Changing some provisions would satisfy two crucial groups that supported Donald Trump's election. First, middle-class households, and especially those in the Rust Belt states, which were most affected by the redistribution of mortgage lending after Dodd-Frank. Second, credit unions and small banks, which have been complaining for months about the regulatory burden Dodd-Frank imposed on mortgage origination activities,” D’Acunto says.
But such a move risks bringing a return of predatory behavior in lending and mortgage cross-selling, especially by large banks and by nonbank mortgage originators, he says. “To avoid such consequences, Congress should only intervene surgically on Title XIV, and only reduce the regulatory costs imposed by the new Qualified Mortgage (QM) rule.”
Rossi says the Republican-controlled Congress may also take aim at the Consumer Financial Protection Bureau, an agency created under Dodd-Frank. “It’s been a third-rail issue since it was created,” Rossi says, in part because the agency has a single director, rather than a commission at the helm. Critics charge that’s too much power, and Republicans say the director has gone too far in restricting lending practices.
“There was a lot of regulation, and it did stifle credit lending,” Rossi says. “As a result, if you look at the quality of mortgages that have been originated from 2009 until now, they are the most pristine mortgages you have ever seen — 20 to 30 percent down-payments, high credit scores, verified employment and income.”
Now, he says, the pendulum could swing more toward the opposite direction. The director could be asked to leave, and a 4-3 bipartisan board could replace him and impose a relaxing of rules, Rossi says. Credit lending would subsequently expand, and the housing market would begin to hum, Rossi says.
Another big question is what a Trump administration will do about mortgage giants Fannie Mae and Freddie Mac. In September 2008, the government-sponsored enterprises were put under conservatorship as the financial crisis took root. Trump’s nominee for Treasury Secretary, Steven Mnuchin, has signaled that he’d like to see the pair spun off or privatized.
“I think the reform all starts and ends with ‘How do you deal with the GSEs?’” Rossi says.
Trump has said he is open to pushing for what people call “recap and release,” in other words recapitalizing Fannie Mae and Freddie Mac and releasing them from conservatorship. Such privatization would likely receive a warm welcome from Republicans on the Hill, Rossi says, who historically have never really liked the GSEs. “They feel we have over-subsidized housing for many, many years,” Rossi says. “Republicans would say that the GSEs ... have pushed homeownership to levels that are too high, artificially high.”
But Congress might not be in a hurry to release Fannie and Freddie. When the government altered the terms of that 2008 conservatorship deal in 2012, and began repatriating Fannie and Freddie’s profits each quarter, it became a sort of “cash cow,” Rossi says.
Predicting Trump’s next move is something of a Herculean task. In the long presidential campaign, Trump delivered lots of promises, but few policy details. Determining what policies he might pursue, therefore, requires a bit of guesswork. On housing policy, in particular, Trump’s comments were “sparse,” Rossi says.
“There are a lot of wildcards here. Because this president is not a mainstream Republican by any stretch, it’s hard to say what he will want to do,” Rossi says. “In that context, whether you like him or hate him, it’s refreshing because he comes in without any preconceived ideological perspective.”
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