Change (or not) may be coming to your duly-elected Congress in just a short while, as mid-term elections for members of Congress will happen on November 4. By many accounts, we've had a fairly "gridlocked" Congress over the last couple of years, one where neither Democrats nor Republicans can get much of their agendas pushed through. Depending upon your own political bent, this may be a good or bad thing, but the reality is that there are things which need to be done, and to get them done, compromises will need to be made at some point.
Perhaps a new Congress (or a different mix of elected folks) would allow for necessary change. Although there are myriad issues facing housing and mortgage markets, we've picked out five areas that we think need some immediate attention, and speculate which side of the aisle might be most likely to push them through -- or where compromise might benefit both sides (and taxpayers and homeowners, too).
No. 1: Fannie/Freddie reform (and G-fee/LLPA tweaks, too?)
Two presidential and two Congressional election cycles have passed since Fannie Mae and Freddie Mac failed and were put into conservatorship. Over the last six years, any number of plans have been floated to "reform" government's role in mortgage and housing markets -- everything from virtually no change to complete overhaul.
Yet nothing has been done. Sure, we've got new regulators and overseers, and it’s fair to say that the $180 billion taxpayers spent to keep the GSEs afloat was money well spent (and mostly repaid, through actual cash and some tax credit arrangements).
Would a new Congress really press for Fannie, Freddie reform?
If a Republican majority was in power, it’s certainly possible that something like a Johnson-Crapo reform might make it through; Democratic majorities failed to press any change into place, so it would appear the status quo is the preference. That said, it's a tossup as to whether we will see meaningful reform no matter who comes into power. The fact of the matter is that there is no viable alternative to Fannie and Freddie that’s ready to go.
If anything, the next Congress might compromise to combine the two entities into a single one, allow them to carry just enough capital as to be considered solvent again and remove them from conservatorship. Any "excess" capital might be used to purchase or subsidize mortgages made to low-to-moderate income borrowers or other "risky" portions of the market, helping to promote sustainable homeownership. Of course, doing this would prove a daunting challenge even for a more unified Congress, making this sort of outcome unlikely.
With regard to true reform, our guess is that nothing happens, regardless of who's in. However, Congress or the Federal Housing Finance Authority (FHFA) might at least consider modifying some of the Loan-Level Pricing Adjustments (LLPAs) put in place by Fannie and Freddie over the last few years, improving access to lower cost credit for some borrowers. Failing that, the increases in guarantee fees imposed over the last few years might be rolled back a little, lowering costs for all borrowers.
No. 2: Debt Forgiveness Act
All the way at the beginning of the mortgage and housing collapse, Congress did manage to get at least one thing right: eliminating the tax penalty for homes sold in short sales, principal forgiveness in loan modifications and deed-in-lieu-of-foreclosure transactions.
The Mortgage Forgiveness Debt Relief Act of 2007 has been instrumental in helping stricken homeowners rearrange their debts or get out of underwater mortgages. When a lender accepts less money from the borrower than what is contractually owed, the difference is treated as a gift to the borrower and is subject to regular income tax. Since it is treated as income, it can even push someone into a higher tax bracket, compounding the hit.
For example, an underwater homeowner owes $100,000 but by agreement the property will be sold for $70,000. The $30,000 differential is treated as income, and the borrower would be liable for thousands of dollars in taxes as a result; a borrower in a 28 percent bracket would see a tax bill of $8,400 from this transaction. Ouch.
The 2007 Debt Relief Act eliminated this penalty, since without it there is no real tangible benefit to the borrower from this extinguishment of debt. Unfortunately, the Act was allowed to expire at the end of 2013, and this beneficial assistance for homeowners may be preventing many from getting the best mortgage modification (principal reduction) for their needs. Worse, this may deter underwater homeowners from putting their homes on the market, in turn keeping inventories low and preventing the housing market from returning to more normal levels.
Why hasn’t the Debt Relief Act been extended?
You would think this would be a no-brainer, a slam dunk of an opportunity for either party. Republicans usually favor tax cuts; Democrats like to be thought of as helping the middle class. Both want to be seen as trying to help the housing market, but home-related tax issues tend to become class-warfare issues as they tend to favor "wealthier" Americans (or at least those wealthy enough to have bought homes). At the moment, an extension is hung up in Congress (surprise, surprise) as it has been attached to tax items totally unrelated to housing.
Our guess is that regardless of who gets in, the Act will be renewed after the elections, probably extended through 2016, and retroactive to the first of the year 2014.
No. 3: First-time homebuyer tax credit
It has been said that one of the key demographic groups missing from the housing recovery are traditional first-time homebuyers. There may be many reasons for this:
- Lack of affordable housing in key markets
- Weak income growth
- High debt loads among the young
- Tight lending conditions
- Demographic shifts
- Changes in attitude toward the value of homeownership; and other concerns.
What about a lack of incentives or compelling reasons to buy?
Back in 2008 through 2010, the slumping housing market was revived for a time by a variety of tax-abatement offers, ranging from a $7,500 no-interest loan (which came with some repayment terms) to an $8,000 tax credit offer. For some, this was a virtual "cash-back" program.
In 2010, the Government Accountability Office (GAO) reported that, all told, about 2.7 million first-time homebuyers took advantage of the program (and another 600,000 got a more limited $6,500 credit as repeat buyers).
Could a new first-time homebuyer tax credit revive home sales again?
The 2010 GAO report noted that the credits "cost" taxpayers about $23 billion -- a pittance when compared against how much money has been collected in fines related to the mortgage mess. Perhaps some of the windfall from the various mortgage settlements might be used in order to produce a more "revenue neutral" federal budget item.
If there is a concern about a spike in demand from first-time homebuyers overwhelming or distorting markets -- demand outstripping supply -- these offers could be metered out in a lottery system over a period of time.
Would either Democrats or Republicans champion a new tax credit?
Well, the last offer originated under a Republican administration and was modified and expanded under a Democratic one, which probably gives it an equal chance of never again seeing the light of day, no matter how beneficial or useful to the market it may be.
No. 4: Buybacks: Safe haven for "low-mod" mortgages
"Expanding the credit box" for mortgages has gotten a lot of lip service in the past year, yet tight underwriting standards persist. As a result, more marginal borrowers are not finding affordable mortgage loans -- or any mortgage loans at all -- to meet their needs.
Lenders have been rightfully concerned that loans made to "riskier" borrowers may fail in the years ahead, and the new Ability to Repay (ATR) rules require a lender to have a kind of crystal ball as to the future fortunes of a borrower. Should a loan fail in the next three years, lenders may be required to "buy back" the loan from Fannie or Freddie; as a result, lenders are only making loans to borrowers with the greatest likelihood of success.
To help encourage lending to lesser-qualified individuals -- "expanding the credit box" -- perhaps Congress might consider a "carve out" provision to remove the threat of buybacks -- either shortening the period of time needed for a borrower to be considered successful, or by classifying certain combinations of credit/down payment/income/etc. as exempt from buybacks should the loan fail through no fault of the lender (i.e. loan has met ATR and documentation rules). With clearly defined exemptions, lenders would be encouraged to make more of these loans, and they might be able to count under affordable housing goals for both the lender and the GSEs.
As we write this, the FHFA is in the process of clarifying certain buyback rules for lenders, which may provide some incremental relief for banks worried about buybacks, but more will need to be done.
As Republicans seem to favor removing rules that restrict the flow of business, and Democrats often favor affordable housing goals, it would stand to reason that this would be doable under a Congress of either demeanor. This might be somewhat more likely to occur under Democrats, since "low-mod" lending probably isn't a significant business opportunity.
No. 5: Stop the endless lawsuits
You can say a lot of things about the aftermath of the housing and mortgage market collapse, but you can't say with a straight face that there haven't been enough lawsuits, and new legal actions are still going on today.
The reality is that these lawsuits have been a double-edged sword, and neither edge has been all that beneficial for consumers. Even as record penalties against banks and lenders are tabulated, mortgage relief for aggrieved homeowners has been small at best; many who failed out of the system over the past seven years have received nothing but a bad taste in their mouth for the experience.
Lawsuits do not encourage lending
Meanwhile, the hostile legal environment for mortgage lending -- on top of a stiff regulatory environment -- isn't exactly the kind of environment which encourages lenders to make loans. Certainly, parties damaged by malfeasance should be able to seek legal redress, but when is enough, enough? It goes without saying that the penalties which arise from these lawsuits are being borne by today's investors, shareholders and borrowers, with yesterday's problems contributing to a hostile lending and borrowing climate today.
Potentially endless legal liability is a considerable deterrent for a lender looking to serve riskier borrowers. Millions or billions of dollars in fines may redistribute capital but not in a manner which produces more mortgages or make them easier to obtain, let alone make it desirable to lend to "riskier" borrowers.
Arguably, since many of these lawsuits were filed under a Democratic administration, a Republican-leaning Congress would be less likely to continue to press this avenue. That said, "bashing the banks" has become a popular sport in recent years, and since no one wants to be on record defending the "bad guy," these things may just have to fully run their course.
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