Voters delivered a Republican trifecta in Washington, D.C., but a razor-thin House majority and the Senate filibuster will put some limits on what is legislatively possible for President Donald Trump and the GOP Congress. The President and financial regulators will have a greater ability to deregulate, though recent Supreme Court decisions could rein in those efforts to some degree.
Within this backdrop, we see the following risks and opportunities for the multifamily housing industry.
- Tax legislation: The House and Senate can enact tax policy on simple majorities and thus bypass the 60-vote threshold in the Senate. The expiration of some 2017 Tax Cuts and Jobs Act (TCJA) provisions means that tax policy will be a top priority for Congress.
- Housing finance reform: The first Trump administration made ending the government conservatorship of Fannie Mae and Freddie Mac (the GSEs) a priority, and we expect a renewed effort.
- Regulatory cleanup: The market, including the CRE industry, is looking forward to appropriately tailored regulations and a clearer regulatory process. More certainty around the regulatory landscape will help businesses make more rational investments. However, some market participants are concerned that tariffs and the potential deportation of millions of people in the construction industry could raise costs and slow down the hoped-for expansion in housing supply.
- Bipartisan housing priorities: Democrats and Republicans agree that housing is too expensive for many Americans. There is even widespread agreement that increasing the supply of housing is the best solution. However, the policy solutions between the parties are not necessarily aligned.
Tax legislation
Congress will use the budget reconciliation process to address expiring TCJA provisions and make other tax changes. Most of the expiring provisions are related to individual income tax, but the 199A 20% deduction on Qualified Business Income for passthrough companies is a key provision set to lapse. Many in the real estate community, and many businesses across the country, are organized as passthroughs, and the 199A relief has provided greater parity with corporations [that saw a major tax reduction in TCJA].
Although we certainly do not expect Republicans to propose tax increases, lawmakers continue to be concerned with the federal debt and deficit. And if certain tax priorities have greater political momentum (no tax on tips, lower corporate rate, etc.), negotiators may seek to “offset” certain cuts by eliminating deductions or other types of favorable tax treatment. As of now, real estate and housing have not been singled out, but the industry remains vigilant as the legislative sausage-making gears up.
Housing finance reform
The Federal Housing Finance Agency (FHFA) took over as conservator of Fannie Mae and Freddie Mac on Sept. 6, 2008. While there have been regulatory changes to some key elements of the structure, there is still no clear exit date or plan to release the housing agencies from the conservatorship. The first Trump Administration prioritized a GSE conservatorship exit, which kicked off with a White House Memo in March 2019 directing Treasury to develop a housing finance reform plan. We expect Trump’s FHFA director to prioritize an exit, and although legislative action is possible, it would face an uphill battle.
Regulatory
We anticipate a financial regulatory regime that is acutely focused on deregulation. While Trump has embraced populist movements, including the potential imposition of tariffs on key trading partners, he gravitates towards leaders who will bring some sense of normalcy and more traditional Republican values to financial regulation. Given that he tends to view market performance as a daily report card, he seeks to avoid chaos in the financial markets, unlike other elements of his perceived governance mandate.
As widely expected, President-Elect Trump’s picks to head financial regulatory agencies have been largely in line with traditional Republican priorities. His nomination of former Securities and Exchange Commissioner (SEC) Paul Atkins to lead the SEC is a good example of looking to people with relevant experience for economic and financial policy.
Three key regulatory focus areas for CRE finance include the status of the proposed Basel Capital Endgame, CFPB overreach, and the SEC’s final climate disclosure requirements and other regulatory activities.
Proposed Basel Capital Endgame
Proposed in July 2023, the Basel Capital Endgame saw unprecedented pushback both from the banking industry and senior Republican policymakers given the proposed 19% jump in required capital at the biggest banks. Democratic lawmakers also opposed the much higher capital requirements for residential mortgages as well as tax credit equity funding in the renewable energy space.
From a CRE perspective, it was more of a bit of a mixed bag. It introduced more graduated capital requirements for CRE loans based on LTV which overall would have reduced capital requirements. However, punitive treatment of securitization and warehouse lines as well as other unreasonable measures like universal cross-default provisions would have raised the cost of funding significantly in an already difficult financing environment.
In September, Fed Vice-Chair of Supervision Michael Barr outlined the recommendations he would make for a reproposal, significantly reducing the proposed increases in capital for the larger banks. Inter-agency disagreements, however, prevented the reproposal from moving forward. Following the election, when testifying during an oversight meeting in front of the House Financial Services Committee, Barr stated that the Fed would not proceed further on Basel until the new banking agency leaders were in place. Trump will be able to nominate a new Office of the Comptroller of the Currency (OCC) Comptroller and chair of the Federal Deposit Insurance Corporation (FDIC).
For now, the Basel Endgame is dead, but it could be resurrected with less onerous requirements. A reproposal and final rulemaking, however, would likely take several months if not more than a year.
CFPB overreach
An easier way to pull back regulatory overreach would be to eliminate the Consumer Financial Protection Bureau’s (CFPB) multifamily reporting requirements under the Home Mortgage Disclosure Act (HMDA). The HMDA reporting requirements have existed to collect loan origination data on residential mortgage loans and detect potential discrimination. However, in 2015, despite pushback from CREFC and other multifamily advocates on the significant differences between single-family and multifamily financing, the CFPB expanded HMDA requirements to include multifamily.
The CFPB used a similar approach to the 1071 Small Business Lending Data reporting. While the CFPB exempted multifamily loans, they required other CRE mortgages under a certain threshold to be reported. Again, the CFPB lumped very different financing products into the same reporting regime.
After collecting this information for half a dozen years, the CFPB has never published or cited the information in any of their HMDA analyses. This should be an easy policy win: stop mandating the collection of data that no one uses.
The CRE finance industry, no different than the overall financial markets, found some of the SEC’s activities under current Chair Gary Gensler to be solutions in search of problems or developing new requirements outside of the standard rulemaking process. Some of Gensler’s most controversial policies, like the climate disclosure rule, are currently working through the courts, but a new chair could decide to stay the litigation and re-propose the rules, pursue settlements, or simply decide no longer to defend the rule in court. We could also see the new Republican-controlled Congress use the Congressional Review Act to unwind the SEC’s most recently passed rules.
It is important to note, however, that at least in the case of the climate disclosure requirements, momentum may continue in at least a few key states, including California. A more stringent climate disclosure law just survived at least its first pass through the courts. Given the low threshold for companies to have to comply with the California requirements, the unwinding of Federal-level regulations may not offer quite the expected reprieve.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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