Realtor lobbyists and policy makers are gearing up for what could be the fight(s) of their careers.
By Andrew Kantor
John DiBiase points to the Capitol dome, a few blocks from NAR’s D.C headquarters. “We have to make sure that those people over there don’t do anything to fundamentally alter the relationship you have with your clients.”
And that is the crux of the matter, at least from a Realtor® perspective. DiBiase should know — he’s communications director of NAR’s Government Affairs Division.
As the wrangling over all things economic continues on Capitol Hill, VAR and NAR are in the thick of it. With the economy at the top of everyone’s minds, their lobbying and public policy teams need to be at the top of their games.
This year there are two topics in the forefront: the federal budget (should changes to the mortgage interest deduction play a role?) and reforming the secondary mortgage market (what should the government’s role be?).
Although the President’s deficit reduction task force — and a group of senators led by Virginia’s Mark Warner — have put the MID on the table, so far no actual budget proposal has included reducing or eliminating it.
But that could easily change, explained Linda Goold, NAR’s director for tax policy, because — oddly enough — of the threat of a government shutdown. Normally, she said, a vote to raise the federal debt ceiling is straightforward, if unpopular. “They hold their noses, make speeches… and pass it,” she said.
This year, though, for the first time, Republican lawmakers are trying to attach other, controversial legislation to the debt-ceiling vote — such as cuts to Social Security, Medicare and Medicaid, as well as abortion restrictions and environmental laws. That turns what has always been quick (if distasteful) into yet another full-blown battle.
And, said Goold, “We fear that that is the context in which there [will be] some kind of attack on the mortgage interest deduction.” Because Congress has to raise the debt
ceiling; the Fourteenth Amendment requires the government to pay its bills.* And not paying its bills — defaulting on our debt — would have devastating consequences for the economy.
Which means “the conversation will turn to deficit reduction,” and will lead to talk about tax reform. And wen tax reform is the issue, the tax benefits attached to the real estate market end up in the crosshairs as members of Congress ask themselves, as Goold put it, “Do we want to be foregoing over a trillion dollars in revenue?”
It’s Realtors®’ job to explain that, while the short-term benefits may be appealing, messing with the MID would be disastrous in the long term.
Teaching isn’t easy. “A lot of new people in Congress have never dealt with housing issues,” said Tony Hutchinson, NAR’s senior policy representative for financial services. He’s focused on the second major real estate-related topic on the agenda: the secondary mortgage market, and what role government-sponsored enterprises Fannie Mae, Freddie Mac — and the government in general — should play.
A fine and (mostly) private place
From a Realtor® perspective, the position is clear: 1) GSEs like Fannie and Freddie need to play some role, and 2) any kind of GSE reform has to be integrated and comprehensive.
“A piecemeal approach to reform … will erode lender confidence,” Hutchinson explained. And no matter what the final picture looks like, the federal government will need to be a part of it.
“Only academics and think tanks want a fully privatized secondary mortgage market,” he said. Because when times get bad, “private capital heads to the sidelines.” That doesn’t mean the government should be the only player in the secondary mortgage market, but it needs to have a role so that “in the event of a hundred-year storm like we just had, we continue to have the free flow of mortgage capital.”
NAR lobbyist Ken Wingert also cautioned against removing the government from the process entirely. Right now, he pointed out, there are four major players in the mortgage game: Bank of America, Chase, Citigroup, and Wells Fargo.
“If we go to a fully privatized market,” he said, “we’ve just made ‘too big to fail’ even bigger.”
Choosing the sweet spot between too much and too little government involvement in the mortgage market won’t be easy, but Hutchinson said it’s important that the decisions be made carefully.
“You’re going to hear a lot of noise, you’re going to see a lot of screaming and yelling, but the idea that we have to take it slow is being heard. NAR is working on the issue, he said, and is developing its own comprehensive plan that balances the power of profit motive with the necessary support of the housing market. (One possible model: the Export-Import Bank of the United States, which was created by the federal government to fund some international transactions when private lenders either can’t or won’t because of political or commercial risks.)
Skin in the game
The issue gets more complex when the idea of QRMs — qualified residential mortgages — is added to the mix, thanks to the Dodd-Frank financial reform bill.
The housing crisis and Great Recession was precipitated by too many people who couldn’t afford mortgages getting them anyway, because loan originators had no reason to care what happened after the borrowers left the office. Those loans were sold, divided, and mixed with others to create those infamous collateralized debt obligations — securities traded like stocks and bonds.
“Originators,” said Wingert, “could produce the worst loan possible without any risk.” The grenade, in other words, would go off in someone else’s foxhole.
Enter QRMs, which are part of the plan to prevent that from happening again.
Dodd-Frank requires that loan originators maintain some risk — five percent, to be specific — so they won’t be quite so quick to hand over a few hundred grand to anyone with a thready pulse. But that’s a lot to ask, especially of smaller banks. So the federal government will be there to back up some mortgages: QRMs.
If a mortgage lender creates a loan that meets the QRM requirements, that five percent requirement is waived and the government will back the loan. Problem: The law doesn’t define what a QRM is. That’s up to financial regulators from the FDIC, the Federal Housing Finance Agency, the Fed, HUD, the Office of the Comptroller of the Currency, and the SEC.
The initial idea that had been floated (by the FDIC, by the way) would require a 20 percent down payment to qualify for QRM status; the loan would also have to meet the 28%/36% requirement (mortgage payments less than 28 percent of income, and total debt payment less than 36 percent).
QRMs would only be a subset of available loans, of course — although the most desirable. Banks could offer more risky, more profitable loans to clients, as long as they kept that five percent — so-called skin in the game.
But just the existence of QRMs, whatever their form, will have profound effects on the market, Wingert said.
“[QRM] becomes the gold standard, and borrowing costs for the other types of loans will go up.”
Is that a bad thing? It would reduce the number of unqualified people getting loans, put the risk back in the private sector where it belongs, and hopefully protect taxpayers from having to bail out banks that let greed trump common financial sense.
But is it a good thing? Credit is too tight as it is. People with pristine scores, long-term jobs, and obvious financial qualifications are still being turned down by skittish lenders, even with the Fannie/Freddie safety net in place.
Tougher standards and that 5 percent requirement will keep banks from lending, and too many potential home buyers won’t have the 20-percent-down to qualify for a QRM — and they’ll be scared off by the higher cost of non-QRM loans. If we want the economy to recover, we need to get banks lending and families buying again.
Economic policy is complex without a recession still in our rearview mirror, a quibbling Congress, and housing market that may or may not have hit bottom. These days, when we are dealing with all that, Realtors® — and their lobbying and policy teams — have their work cut out for them… and then some.
Linda Goold, for one, is optimistic. “Our hearts are pure,” she said. “We shall not fail.”
* “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”