With the mid-term elections less than two weeks away, the question isn't just which party will control the House and Senate, but what different outcomes might mean for homeownership and mortgage policies.
Most election experts suggest the Democrats will gain control of the House of Representatives, with the Senate a toss-up. A House flip would have a big impact, regardless of what happens in the Senate, because Democrats would then have a seat at the table.
What does this mean for housing and mortgage policies?
The number one issue facing mortgage lenders and homebuyers is the sky-high level of mortgage rates. 30-year mortgage rates doubled after COVID, from 3% in September 2020 to 6% just two years later, then floated upward from there and, after briefly dipping below 6%, shot up in recent months to 7.4%.
As a result, housing starts are down, homeownership has become less affordable, and refis have been reduced to a trickle. While many factors contributed to this spike in interest rates, we should not ignore the classic economic theory of “crowding out.” Our unprecedented $2 trillion annual federal deficit, combined with mushrooming AI private sector borrowing, is pushing interest rates up relentlessly.
Is Washington paying attention to deficit concerns? Not really. Both parties rarely mention deficits on the campaign trail. Democrats keep pushing for more spending, and Republicans for more tax cuts. And why not? Voters seem to reward both, rather than applauding the few deficit hawks who still exist.
Divided government has historically been somewhat more conducive to large budget deals to bring down federal deficits (e.g., the 1990 agreement and the 1997 budget deal that briefly led to a budget surplus). Unfortunately, the acrimony and partisanship in Washington have reached unprecedented levels. Without a burgeoning crisis perceived to be caused by deficits, it is hard to see the cooperation needed to pass legislation that would meaningfully reduce deficits.
The good news is that housing is the one area where Republicans and Democrats have been able to work together, enacting the sprawling 21st Century Road to Housing Act into law this summer. After neglecting housing for many years, it is astonishing that housing was virtually the only major piece of legislation both parties agreed on this Congress. There is optimism that the next Congress will be able to get the same band together to adopt another housing bill, a Road to Housing 2.0, if you will.
However, Road to Housing was more focused on affordable rental housing than on homeownership. It included some constructive homeownership provisions, like FHA assistance for small-dollar loans, elimination of the manufactured housing chassis requirement, and a study on LO Comp. But nothing that is really going to move the homeownership dial in a transformative way.
Which is why CHLA released its Gen Z White Paper in May - a kind of Moon Shot Challenge for Congress to take bold action to address the unprecedented challenges families and individuals in their 20s and 30s face in trying to buy their first home.
The paper cited a National Association of Realtors Profile of Home Buyers and Home Sellers from a year ago that concluded that “the typical age of first-time buyers climbed to an all-time high of 40 years” and “the share of first-time home buyers dropped to a record low of 21%.”
CHLA argues that federal mortgage policies should focus like a laser on entry-level homeownership. Policies like FHA and Fannie and Freddie making it easier – not harder - for condo projects to qualify for mortgage loans. Policies to increase mortgage credit for manufactured housing. And policies like Fannie Mae and Freddie Mac ending excessive LLPA fees for high-balance loans - which are no riskier than lower-balance loans and which are for starter homes in the nation’s most expensive housing markets.
Just two months after CHLA released its Gen Z White Paper, a Goldman Sachs report concluded that for the first time since World War II, stocks now make up a greater percentage of personal assets than homes.
This reinforced a central message of the White Paper: our tax policies favor stocks over homeownership, with a Joint Committee on Taxation (JTC) report documenting that tax benefits for stock investments are almost five times the tax benefits for homeownership.
So bold tax action is needed next Congress to rectify this imbalance.
The housing tax change most likely to be adopted next Congress is an increase in the capital gains exclusion for sale of a principal residence. That would be a good first step.
But beyond tax policy changes that unlock home sales, we also need bold tax actions to unlock stock and retirement assets that could fund a down payment on a first-time home purchase.
We should make it easier to access the trillions of dollars held in 401(k) accounts for a home down payment. Too often, people in their 20s start investing in a 401(k), then discover years later that using those funds for a home down payment comes with a major tax cost. The Administration or Congress could make changes outlined in the CHLA White Paper to remove impediments to using 401(k) loans for a down payment.
CHLA is also proposing a kind of Starker exchange for home purchase, where parents could defer and transfer some of their stock gains when they gift stock sale proceeds to their children or grandchildren for a down payment on a first-time home purchase. With the current capital gains step-up at death, many of these assets will never be taxed anyway.
Finally, what does the new Congress mean for regulatory policies?
Last month, the House Financial Services Committee approved H.R. 10184, a bill to make major changes to the Consumer Financial Protection Bureau (CFPB). The bill would bring the CFPB under appropriations control, change UDAP treatment, exempt more banks from CFPB supervision, and make other changes.
However, the bill was approved on a straight party-line vote, and it is hard to see Congress reaching agreement on these somewhat contentious issues. So, CFPB policies will likely continue to be set by the Trump Administration, which has pursued deregulation, staffing reductions, and a narrower CFPB enforcement focus.
There is more bipartisan consensus on the objectives of federal mortgage programs (FHA, GSE, RHS, and VA). So, CHLA hopes Congress will take more actions in Road to Housing 2 that are focused on first-time, entry-level homeownership.
One other area of interest is bringing down mortgage origination costs.
Recent changes by the FHFA to allow credit score alternatives for Fannie/Freddie loans are commendable, an effort to brake the runaway FICO price increases of recent years. But mortgage executives know that transitioning to new credit score options can be complicated.
So as CHLA argued in a January White Paper, FHFA should not move to adopt a single pull (or bi-merge), as that would both harm consumers and add transitional burdens at a time when the industry is still digesting the new credit score flexibilities.
Election night should be interesting. So too should next year, when it comes to mortgage and housing policies. Stay tuned.
*Scott Olson is the Executive Director of the Community Home Lenders of America (CHLA), the only national trade group that exclusively represents independent mortgage banks (IMBs).
