Editor's note: This feature originally appeared in the December issue of DS News, out now.
The 2018 midterm elections were historic on numerous fronts, with the Democrats retaking the House of Representatives and Republicans padding their majority in the Senate. CBS News and other outlets reported that an estimated 113 million people participated in the elections, which marked the first time in history that a midterm saw more than 100 million votes. Moreover, estimates indicate that around 49 percent of eligible voters participated in the midterms. For perspective’s sake, only just over 36 percent participated in the 2014 midterms, generating one of the lowest voter turnouts in U.S. history.
The elections also saw a number of “firsts” checked off the list. More than 100 women were elected to Congress, and the 2018 midterms also saw a 75 percent increase over 2012 in the number of women of color running for Congress. The tumultuous election night saw the youngest woman ever elected to Congress
(Alexandria Ocasio-Cortez, D-New York, age 29), the election of the first two Native American congresswomen, the first two Muslim congresswomen, the first Korean-American congresswoman, and the first openly gay male governor (Jared Polis, D-Colorado).
With a new status quo settling over Washington, D.C., and the rest of the country, DS News set out to examine the landscape as the dust is settling and determine how this election is most likely to impact housing and mortgage markets going forward.
THE FATE OF THE GSES AND THE BCFP
After a decade under the Federal Housing Finance Agency’s (FHFA) conservatorship, the Trump administration has indicated its intentions to work toward ending the conservatorship of the GSEs, Fannie Mae, and Freddie Mac.
In a recent memo, Laura S. Wertheimer, Inspector General at the FHFA, identified four serious management and performance challenges that the agency faced in its role as a regulator and supervisor of the government-sponsored enterprises. They included: 1) the agency’s inability to improve oversight of both GSEs while strengthening internal review processes for nondelegated matters, 2) upgrading supervision of the GSEs and Federal Home Loan Banks, 3) oversight in cybersecurity, ensuring effective information security in order to protect the sensitive borrower data gathered by the GSEs, and 4) enhancing oversight over the GSEs’ relationship with counterparties and third parties.
While it is possible the conservatorship will be unwound in the next few years, Democratic control of the House makes it likely they will look to build language into any such agreement that would provide funds for affordable housing and offer expanded credit provisions for underserved borrowers. The size and scope of the GSEs are also expected to change.
The stewardship of the Bureau of Consumer Financial Protection (BCFP) is another area that is likely to be impacted by the election results. “Who replaces Director Mick Mulvaney—and whether that new director will continue to take the bureau in the same direction—will depend to a certain extent on which party controls the House and Senate. A more stridently conservative director, for example, is unlikely to be approved by a Democratic House,” Rick Sharga, EVP, Carrington Mortgage Holdings, recently told DS News.
One likely source of friction will be Rep. Maxine Waters (D-California), a vocal critic of President Trump now expected to become the Head of the House Financial Services Committee, which oversees the United States banking system. Waters released a statement after the election indicating that she will make it a key priority to ensure “that [the BCFP] can be allowed to resume its essential role of protecting consumers from harmful practices without interference from the Trump administration.” This could put her on a course to butt heads with BCFP Acting Director Mick Mulvaney, or his appointed successor, Trump nominee Kathy Kraninger, assuming she is confirmed (which is likely with a Republican-controlled Senate).
Waters also said that the House Financial Services Committee would work to protect consumers from fraud and predatory lending.
Sharga said that while the BCFP has been working in tandem with the mortgage industry by soliciting input from practitioners and creating an environment where qualified borrowers got a better chance to secure a loan, “a return to more of an ‘enforcement’ mentality could cause the pendulum to swing back once again and make it more difficult for borrowers to achieve their dreams of homeownership.”
LEGISLATION AT STAKE
With the Democrats in control of the House and Republicans maintaining a majority in the Senate, legislation will demand more partisan cooperation or run the risk of stalling. This new dynamic has the potential to impact numerous pieces of affordable housing legislation, including the Affordable Housing Credit Improvement Act, the New Markets Tax Credit Extension Act, and the Historic Tax Credit Enhancement Act.
Furthermore, while Republican control of the Senate and the White House will make it challenging for Democrats to pass any new regulatory legislation, it will be equally difficult for any new deregulatory bills to make it past the House—a definite change from the landscape of the past two years.
Tax cuts have long been a primary objective of the Republican Party, leading up to the successful passage of the Tax Cuts and Jobs Act in December 2017. However, even with Democrats in control of the House, the two parties might find common cause in further tax reform, and that would inevitably send further ripples through the housing market.
Nine months in, the Tax Cuts and Jobs Act of 2017 appears to have had some impact on home-value growth. Some of the changes brought by the December 2017 act were a $10,000 cap on total state and local tax (SALT) deductions, a lower threshold for full mortgage interest deductions, and higher standard deductions for most filers. According to a report by Zillow, following the introduction of the act, home growth appears to have slowed, particularly in areas with homeowners that historically used the SALT deduction, compared to areas with a lower percentage of homeowners who use the SALT deduction.
Speaking to Yahoo Finance, Robert Hockett, Edward Cornell Professor of Law at Cornell Law School, said, “The progressive wing of the [Democratic] party, which has all the momentum, is not as concerned about the deficits. They would look to keep the corporate tax cuts (instead of repealing them), but also add tax cuts for the middle class and those who need it the most.”
In addition to the larger housing-related issues at stake in the midterms, two particular races involved familiar faces from within the industry itself.
In Oklahoma, Kevin Stitt, the founder of Gateway Mortgage, won the gubernatorial race against Democrat Drew Edmondson. While at Gateway, Stitt was a member of the National Mortgage Servicing Association (NMSA), a Five Star trade association representing 90 percent of the mortgage market.
During the primaries, Stitt gained the support of Republican politicians such as Texas Senator Ted Cruz, who won re-election against Representative Beto O’Rourke (D-Texas).
“I congratulate the voters of Oklahoma for electing Kevin as their next Governor,” said Ed Delgado, President and CEO of The Five Star Institute (DS News’ parent organization). “They have voted for someone whose strong business acumen helped propel a business he founded in 2000 into a nationwide mortgage company and will also help to strengthen Oklahoma’s economy.”
Meanwhile, Richard Cordray, the former Director of the BCFP, lost out to Republican Mike DeWine in his bid for the governorship of Ohio. Cordray has a long history in Ohio. Before his stint as head of the BCFP, Cordray served as an Attorney General, Treasurer, and Solicitor General for the Buckeye State.
Another development to keep an eye out for—former Housing and Urban Development (HUD) Secretary Julián Castro told Rolling Stone earlier this year that he would be making a decision after the midterm election as to whether he would launch a presidential bid for the 2020 election. While he didn’t outright confirm those plans, he did say it was “likely” and that he would “make a final decision after November.”
While Secretary of HUD, Castro focused his efforts on stabilizing the post-Recession market; helping homeowners who lost their properties in Hurricane Sandy, floods, and other natural disasters; and giving public-housing residents access to high-speed internet through the ConnectHome program.
During Castro’s tenure, HUD also worked with the Department of Justice and 49 state attorneys general to protect homeowners from mortgage fraud during the financial crisis. The result was a $25 billion agreement in 2012 with the country’s five largest lenders, providing relief to millions of homeowners across the country.
THINK GLOBALLY, ACT LOCALLY
Voters in key states cast their ballots on housing-related legislation that focused on everything from increasing home construction to introducing new rent regulations to protect tenants. While Georgia passed a ballot referendum to help nonprofits in the state provide housing for those living with mental illness, California voted on three separate affordable-housing ballot measures.
Affordable housing has become a hot-button nationwide issue in 2018. According to the National Association of Home Builders/ Wells Fargo Housing Opportunity Index, only 56.4 percent of homes sold in Q3 2018 were affordable to families earning the U.S. median income of $71,900. That’s down from 57.1 percent in Q3 2018, and represented the lowest percentage since mid-2008. California has become a prime example of the affordability challenges in recent years, home to consistently unaffordable metros such as Los Angeles, San Jose, and San Diego.
The Veterans and Affordable Housing Act will allow the state to sell $4 billion in general bonds to fund existing affordable-housing programs for low-income people, veterans, and farmworkers. Most of the funds will go toward existing affordable-housing programs while $1 billion will go toward veteran housing programs.
Proposition 10—or the Local Rent Control Initiative Act—was one of the most hotly debated pieces of legislation in the Golden State, as well as one of the costliest legislation campaigns this election. According to a CNBC report, proponents of this legislation spent around $26.2 million on the campaign, while those opposed spent $76 million.
At the heart of the battle over this proposition was a state law that restricts the scope of rent-control policies that cities and other local jurisdictions may impose on residential property. If the proposition had been enacted, that law would have been repealed, resulting in a potential net reduction in state and local revenues of tens of millions of dollars per year in the long term.
According to the Official Voter Information Guide on California’s General Election, those supporting the proposition had said that enacting this legislation would restore authority to establish rent control in local communities while putting annual limits on the amount landlords can raise in terms of rent. Proponents argued that this would keep tenants in their homes rather than potentially pushing them into homelessness.
Opponents of the initiative included real estate agents and residential real estate investors, among others, who argued that the legislation would only exacerbate California’s housing crisis. They reasoned that the initiative would have hurt both renters and homeowners as it allowed for the regulation of single-family homes and put “bureaucrats in charge of housing by letting them add fees on top of rent.”
The voters of California sided with the opposition and voted no on this legislation. That means, for now, the 1995 state law remains in place.
THE ROAD TO 2020
While speculation abounds regarding what the next few years will look like, history suggests there will be more than a few surprises along the way, and the industry faces no shortage of challenges regardless of who controls which aspects of the federal government.
Natural disasters are taking an increasing toll—according to the National Oceanic and Atmospheric Administration, there were 31 U.S. weather and climate disasters that caused losses exceeding $1 billion in 2016 and 2017 alone. Earlier this year, a report by the Union of Concerned Scientists estimated that as many as 311,000 coastal homes will be at risk of chronic flooding within the next 30 years. As of this writing, the National Flood Insurance Program is weeks away from expiring unless Congress votes to extend it once again.
While 2018’s twin challenges of home affordability and insufficient housing inventory are beginning to see relief in some markets, many still speculate on when and how the next economic downturn will occur, and how it will impact the housing market when it does. According to a Bloomberg report, “two-thirds of business economists in the U.S. expect a recession to begin by the end of 2020.”
Whatever the future holds, it will be imperative that the industry works diligently to adapt to and anticipate the challenges ahead, whether Washington, D.C., enters a new era of bipartisan cooperation or becomes immobilized—once again—in gridlock.