Source: Andrew King via RISMedia
President Donald Trump has promised many changes since being sworn in a couple short months ago, but one of the more specific—and likely to impact real estate brokers across the nation—is his pledge to “do a big number on Dodd-Frank.”
This call to action is a clear shot across the bow to regulators and Democrats who put new policies in place following the real estate market meltdown of the late 2000s. Much of the president’s stated agenda has been taken with a grain of salt due to his unorthodox approach to communicating with the public. Anyone who follows @POTUS on Twitter knows it’s hard to keep up with what is really being set as a new direction for the U.S. and what is a political sideshow. Yet, there’s something about the dismantling of Dodd-Frank that seems more legitimate than most of the other noise coming out of Washington since Trump assumed the highest office in the land.
But what does this “big number” mean for real estate?
Most likely, it will include a significant rollback in the hurdles that banks must leap in order to issue a loan. The idea is to spur small businesses and strengthen the economy, so small businesses can expect easier financing, such as smaller cash flows to justify larger loan amounts, and hefty interest rates to go along with it.
With mortgages, it’s a similar dynamic. Big banks and community lenders alike won’t be limited by many of the burdensome rules of Dodd-Frank that brokers have been complaining about for years. Income-to-debt ratios may become more favorable for borrowers, appraisers might be held to looser standards when analyzing valuations through comparable sales, and brokers might be able to more easily help facilitate a loan for clients who are at a higher risk of paying it back. Plus, the banks themselves might not be audited and stress-tested as much as they have been under the previous administration.
On the surface, any of this would be good for real estate prices in the short term, and brokers are already preparing for the new deregulatory environment.
“I do believe that rolling some things back will allow more people to qualify for financing,” says Anthony Hitt, CEO of Engel & Völkers North America. “They will buy more properties and prices will go up.”
Hitt, who oversees 2,100 agents in the United States, Canada, Mexico and the Cayman Islands, adds that an overhaul of lending regulations, which would stimulate the housing market in the short term, begs a big question for the long term: “Will we run into the issue where people qualify for loans who shouldn’t have?”
Regardless of the answer, Hitt says he is concerned that many people who went through the previous housing bubble will still be concerned about the question once lending standards are loosened. Those concerns might be hard to overcome as brokers send their agents out to close new business.
“The one thing we need to pay attention to is that a lot of the buying public was affected horribly the last time we went too far. A lot of people remember that, not only because they qualified for vehicles they couldn’t afford, but because people got into vehicles they could afford, but their property values plummeted,” Hitt says. “The good homebuyers might be concerned, and that could be a new phenomenon.”
Hitt adds that millennials are a key home-buying demographic that needs to be both incentivized to make their first purchase and also protected under any pending deregulation.
“Millennials are a growing category,” he says. “Will they have to go down the same road?”
Coming off the last crisis, the stakes are too high now to make another big mistake and there is a lot of attention on the White House and Congress to see how they address Dodd-Frank and the underlying systemic issues that it attempted to correct.
“My concern as a real estate broker is that while President Trump has a lot of knowledge of real estate and making deals, I’m not so sure how well versed he is in non-luxury real estate and non-commercial property,” says John Agostinelli, author of “Easy Money and the American Real Estate Ponzi Scheme and broker/owner of Agostinelli Realty Group based in Massachusetts. “President Trump would do well to become educated about the last real estate cycle, its true causes and why many of the systemic issues that brought us to the brink of financial collapse still exist. He needs to be made aware of eroding underwriting criteria, FICO scores and the pressures from the Real Estate Industrial Complex (REIC), their housing activist allies, together with the politicians who push the same wealth redistribution agenda. Failure to recognize these looming issues over the first years of a Trump administration will only advance the next housing crisis.”
Many say that a smart deregulation strategy would make alternative lending available to more people without qualifying subprime borrowers and inserting their mortgages into investment-grade securities, which endangered the whole credit system when they began defaulting. The problem, brokers say, is that the government tends to overreact to such panics, and Dodd-Frank had many overreaching aspects to it. The challenge now is to not overcorrect again, they say.
Lauren Taylor is the founder of Capaven, a brokerage that specializes in single-family investment properties. She says she would like to see the Trump administration stay out of the housing industry for the most part and establish a “normalcy in interest rates as the low rates are a false sense of affordability.
“For us in particular, Dodd-Frank has been very restrictive. It has tightened lending and made access to capital much harder to reach,” Taylor explains. “The Act, though well intended enough, was entirely too wide-reaching. We saw regulations pinned on the seller financing sector and capital that was needed many times was unreachable for small businesses and operators.”
Like the other issues that the president is tackling in his first months in office, housing deregulation will be one that people do not agree on 100 percent, even within the broker community. However, there does seem to be a growing consensus that Dodd-Frank could use some updating and that more certainty would probably improve consumer confidence—a major factor that fuels all sectors, but has particular importance for an industry such as real estate.
“Homeownership is definitely something that people crave,” says Hitt. “I just get concerned that we don’t learn from our mistakes.”