The Great Recession has caused much economic pain and led, rightly or wrongly, to many regulatory changes emanating from Washington, D.C. While these regulatory changes have impacted nearly every industry, no economic sector has been so directly and dramatically affected as real estate. While this may not be a surprise, it is eye-opening to see the unprecedented amount of regulatory discussions and activities in Washington that will significantly alter the real estate business forever. Whatever the final disposition is for many of these issues, one trend is for sure: the past several and next several years will witness the federalization of the real estate transaction. That is, federal housing, lending and taxing policies will dictate and dominate the rules by which all real estate in America is transferred; and for better or worse, these new housing, lending and taxing rules will determine the very nature of the real estate industry and national economy for decades, if not forever.
Consider the following issues pending in Washington:
The Debt Ceiling Debate
Congress and the Obama administration are engaged in an epic battle over raising the $14.3 trillion national debt limit – a debate that could include a mix of spending cuts and tax increases totaling $4 trillion over 10 years. That’s real money with real macro and micro economic consequences that will directly impact real estate markets.
Qualified Residential Mortgages (QRM)
Washington regulators, working under the new Dodd-Frank Wall Street Reform and Consumer Protection Act, are proposing to require borrowers to make a 20 percent down payment on any home loan to be considered a “qualified residential mortgage.” Anything less would be considered risky and banks would thus charge higher interest rates. If adopted, this change could price many creditworthy borrowers out of the housing market – with dramatically negative impacts to real estate and the overall economy.
Tax Reform and MID
The tax-writing committees in both houses of Congress continue to hold hearings on major tax reform proposals, including whether lower personal and corporate income tax rates should be pursued by eliminating existing deductions, which include changing or eliminating the mortgage interest deduction (MID). The President’s federal debt commission called for eliminating the MID for all second homes, lowering the cap on qualifying mortgages from $1 million to $500,000, and converting the deduction to a 12 percent tax credit. This proposal is both ill-timed and ill-advised, and would adversely impact home values and place a significant drag on economic recovery.
GSE Reform
After the takeover of Fannie Mae and Freddie Mac, Congress and the Obama administration are now contemplating major reforms, including merging these giant mortgage companies and/or permanently eliminating or privatizing them. A fully private system is not viable or sustainable, and such a system would severely restrict mortgage capital, raise the cost for qualified and creditworthy homebuyers, and place taxpayers at greater risks, as “too-big-to-fail” government-backed financial institutions dominate the market.
FHA/GSE Loan Limits
The current loan limits for FHA and the Government Sponsored Enterprises (Fannie and Freddie) are due to expire October 1st. If that happens, the loan limits will drop, lessening the availability of mortgage credit to hundreds of thousands of responsible, credit-worthy families nationwide. In fact, 42 states would see an average decline in loan limits of more than $68,000, eliminating housing opportunities for many American families.
SAFE Act
HUD has submitted final rules under the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act), which requires states to establish loan originator licensing requirements to meet minimum federal standards. NAR is asking HUD to exempt all or certain seller financing from the licensing requirements and to clarify that payments of commissions by a lender for the sale of a lender owned property (REO) do not require the real estate agent to be licensed as mortgage loan originators.
Other major issues include:
Federal Trade Commission assistance relief services (MARS) regulations (REALTOR® disclosure requirements in short sales).
- Covered bonds (could increase liquidity and safety in commercial and multifamily markets).
- Credit union lending (increase the cap on member business lending for well-capitalized credit unions).
- Privacy and data security (impact of numerous related bills on how such regulations will impact REALTORS® and real estate practices).
- Health reform implementation (small business and independent contractor issues regarding the implementation of exchanges, grandfathered plans, and essential minimum benefits provisions of the new federal healthcare law).
As our industry struggles to find the bottom of this market and plot its resurrection, the outcome of these and other public policy issues will directly impact your business and your future. As the federal government seeks greater involvement in the real estate transaction, REALTORS® must respond by seeking greater involvement in the legislative, administrative and political processes that will determine the final outcome of these important issues.
Michael Theo is Senior Vice President of Legal and Public Affairs for the WRA.