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Cover story As the industry becomes a battleground in Capitol Hill's turf war, how will partisan politics, presidential pressure, and persistent policy struggles influence the market in 2013? By Adam Weinstein T he votes are in, and the (re)inaugural balls are scheduled. Barack Obama hung on to his job at 1600 Pennsylvania Ave., eking out a bigger margin of victory than George W. Bush managed in his reelection eight years ago. So now that the electoral silly season is over, can mortgage and housing professionals expect more of the same policies they've dealt with since 2009? Hardly. Get ready for another regulatory roller coaster. Even though voters affirmed the current balance of power— a slight Republican majority in the House of Representatives, Dems in the White House and Senate—both sides are under pressure from the American public to move the country past its Great Recession. And although the REO overhang looms large, home values have started to see consistent rises, undercutting industry professionals' perennial arguments that intervention could send housing further down the spiral. These factors leave an opening for a reinvigorated Obama administration to send mortgage-industry reforms into overdrive. "Now that the election is finally behind us, there should be no more political risk in addressing the housing problem head on," Alex Villacorta, director of research and analytics at California-based valuation firm Clear Capital, said in a November news release. "President Obama's housing policies must evolve to turn the recovery's sprint into a marathon." Here's a quick rundown of the areas where presidential action could impact housing—and the broader economy—relatively soon. 01 Joe Taxpayer's Dying Deduction One unexpected casualty of the president's re-election could be the consumer's long-lived tax deduction for mortgage interest payments, which benefits high earners and itemizers. The left has long argued that America needs to raise taxes on the wealthy to goose growth in the middle class; conservatives have vowed not to permit tax hikes on any Americans. But both sides have vowed to compromise by looking at closing "loopholes" and limiting deductions—and the "fiscal cliff" helped focus attention on the mortgage-based tax-break. "This is definitely a chance worth jumping for," University of Chicago business-school professor Amir Sufi told the New York Times in late November. "For a fixed amount of revenue, it's better to remove deductions than increase marginal tax rates." That plan would pose a serious downside to housing and mortgage pros, possibly encouraging more prepayments and smaller originations. But the good news is, the government could take a variety of approaches that fall well short of wiping out the entire deduction. Feds could get rid of the deduction only on second homes, or lower the cap on principals whose interest payments are eligible, or lower the total percentage of paid interest that homeowners can deduct. Freakout Factor: On a scale of 1 to 10, consider this one a 4. It might scrape through Congress as a bipartisan compromise, but if it does, don't expect the entire deduction to go away. As an analyst at The Street puts it, "It seems unlikely that modest changes in the law would be devastating for the average homeowner." Time frame: Sooner rather than later. It'll be on the table in the "fiscal cliff" talks, and it'll continue to be part of the revenueraising conversation long after. 02 Doubling Down on Refi's If you can remember all the way to January 2012, President Obama outlined most of his biggest plans for housing in his previous State of the Union (SOTU) address. One of his top priorities was expanding on the administration's long-standing efforts to get existing mortgages refinanced to keep more homeowners out of default. So far, those efforts have led to a very modest success: 1.5 million modified loans under HAMP, and another million refi's under HARP, since 2009. But Obama's ambitions went beyond that, to "a plan that gives every responsible homeowner the chance The M Report | 23