The midterm U.S. elections are coming. And elections have consequences for the housing market, according to a new report from investment bank Cowen.
The report by Cowen’s Jaret Seiberg noted that the Nov. 8 elections will determine which party controls the House and the Senate for the next two years.
And the result will then impact a number of issues related to housing finance policy, he said.
First-time buyer tax credit gone
Assuming Republicans “will at a minimum gain control of the House,” Seiberg wrote, that likely means no first-time buyer tax credit.
The tax credit was, through a revision of the Internal Revenue Service tax code, to give first-time home buyers up to $15,000 in refundable federal tax credits. Democrats tried to pass the tax credit last year through a so-called reconciliation bill, Seiberg noted. But a new reconciliation bill is unlikely, he added.
Unlikely to get funds for rehab housing
The original reconciliation package had another big housing component — rehab housing.
The package had earmarked billions in funds to construct, renovate, or purchase affordable public housing, Seiberg noted, which would help with rental housing. “It is hard to see how this gets past a GOP House,” he noted.
No reform for Fannie and Freddie
Fannie Mae
FNMA,
and Freddie Mac
FMCC,
are likely to remain under government conservatorship, regardless of the outcome of the election, Seiberg wrote.
Fannie and Freddie are federally backed home mortgage companies created by Congress. They buy and guarantee mortgages issued through lenders, like banks
KBE,
and fintech firms. They then hold the mortgages or sell them as securities on the secondary market.
They are under the direct supervision of the federal government. The government took control of them and put them under conservatorship under the Federal Housing Finance Agency in 2008, as the housing market began to melt down from subprime loans.
The Trump administration had wanted to take Fannie and Freddie out of government conservatorship. But don’t expect that to happen anytime soon, Seiberg wrote, and regardless of who wins.
“The issue is politically contentious. It splits Democrats and Republicans. We don’t see a bipartisan solution,” he noted. “What could happen is more talk of regulatory reforms, though it is hard for us to see action until after the 2024 election.”
Expect FHFA premiums to be cut
Regardless of who wins, expect lower premiums for prospective mortgage borrowers, Seiberg said.
If a potential homeowner has a lower credit score, or a smaller amount of money saved for a downpayment, they can take out a FHA loan instead of a conventional one. But FHA loans come with a mortgage insurance premium, which is an additional payment that homeowners will make to secure the loan.
The premium is two-fold: An upfront cost, and an annual payment.
FHA borrowers currently pay 0.80% per year in annual premiums, according to the agency’s website, for loans less or equal to $625,000 and a downpayment of 5% or more.
If the mortgage insurance premium rate is cut, that could save a homeowner thousands of dollars in one year if they’re purchasing a new home or refinancing.
For a $150,000 home, the premium is $1,200 a year (or $100 per month).
“President Biden already has his [Federal Housing Administration] commissioner and [Housing and Urban Development] secretary in place. It is why even a GOP sweep should not prevent Team Biden from cutting FHA premiums,” Seiberg said.
“We still expect a 25 basis point cut to the upfront fee and a 25 basis point cut to the annual fee,” he added.
Chaos at the Consumer Financial Protection Bureau
In mid-October, a federal appeals court said that the Consumer Financial Protection Bureau, a financial watchdog agency, was unconstitutional due to its funding.
If the Supreme Court agrees, then this could lead to the Qualified Mortgage rule, and the revised Real Estate Settlement Procedures Act (RESPA), both being invalidated, Seiberg said.
According to the Urban Institute, the QM rule was created by the CFPB that sets standards for lenders and investors, so that they can protect themselves from being sued by borrowers who claim that they were provided a loan that they couldn’t repay.
RESPA prohibits things like kickbacks for business referrals, unearned fee arrangements, and so on, which is in the consumer’s interest.
And “that could create regulatory chaos as lenders will be unsure of what rules to follow,” he stressed. During the Mortgage Bankers Association’s annual conference in Nashville, Tenn., this issue was raised as a significant one to watch among lenders.
If the rules of the road are unclear, then consumers may sue lenders more often for predatory or unethical behavior, and hence lenders could face increased legal liability, Seiberg noted.
“Solution would be for Congress to authorize funding for the agency,” he added, “which could then ratify its prior actions.”
If the GOP seized control of just the House, such a move could become complicated to pull off, “as Republicans may either refuse to fund or underfund the agency,” Seiberg said. “This could create a standoff with Biden, who could reject anything but full funding.”
Got thoughts on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at [email protected]
