To borrow a phrase from that great Londoner Charles Dickens – it was the best of times, it was the worst of times. I’m talking, of course, about the US mortgage banking industry where origination profit margins are the best they’ve been in years, but where there are so many unknowns that planning for the future is nearly impossible.
First, let’s talk about those unknowns, the biggest of which is Fannie Mae and Freddie Mac, the congressionally chartered mortgage banking giants that currently buy 70% of all home loans originated in the US.
Both continue to lose money – though a lot less lately – and they’re also wards of the government, having sucked up $150bn in government aid since being taken over the Treasury department 26 months ago.
Other unknowns include a messy national foreclosure scandal where a half dozen or so major servicers admitted they got sloppy with their paperwork and kicked people out of their homes when they may have lacked the legal right, and a fear that although profit margins on new loans are strong, few Americans are buying homes these days. In short, lenders know they cannot live off refinancings forever.
So it’s an ugly stew, made more complicated by the Republican Party taking control of the House of Representatives on November 2. Not only did the Grand Old Party pick up 60 or so seats – a few recounts have yet to be settled – it now leads the chamber by 239 seats to 185.
The Democrats have a slim margin in the 100-seat Senate and President Barack Obama is still in charge of the White House for at least two more years.
The mortgage interest deduction costs Treasury $130bn a year – money that could reduce the deficit
Being a mortgage banker has never been easy. Many of the executives I’ve known over the years lean to the Republicans by a wide margin. But they manage a business that traditionally and historically has been looked upon favourably by Democrats.
Republicans have always felt that housing in the US received too much government support in the form of tax breaks and the hands-off regulatory approach once afforded Fannie and Freddie.
It might be argued that Republicans were eventually right about Fannie and Freddie after being wrong for 50 years, but that’s another column for another time.
But getting back to the GOP, housing and mortgage banking. With the Republicans firmly in charge of the House of Representatives, the long-cherished tax deduction for mortgage interest payments by consumers may finally be on the chopping block.
In a few weeks, when the president’s bipartisan commission officially releases its recommendations for solving the nation’s staggering debt load, we’ll know for sure. Republicans have been trying to kill the mortgage interest deduction on and off for decades.
According to the Urban Institute – a non-partisan economic and policy think tank based in Washington – the mortgage interest deduction costs the US Treasury $130bn a year in tax receipts – money that would reduce federal deficits by a similar amount.
Industry lobbyists and executives have been hearing increasing talk over the past several months that the commission will recommend trimming the cap on mortgage interest deductions to loan amounts of $750,000 or less. Interestingly, the $750,000 figure is almost equal to the Fannie Mae/Freddie Mac loan limit cap.
Currently, the mortgage interest deduction has a ceiling of $1m of mortgage debt, which means that if housing-related lobbyists get to the panel members and convince them to stop at $750,000, it won’t result in much revenue flowing back into Uncle Sam’s coffers.
And there’s a fear that some panel members might go for the whole enchilada. After all, when it comes to raising revenue, it’s a lot easier killing an existing deduction than raising taxes.
Some in the industry believe $750,000 is something they can live with. But the National Association of Realtors, whose core business relies on mortgage liquidity, isn’t taking any chances. The trade group is already mobilising with a national advertising campaign, reminding voters that ’Home ownership matters – to people, to communities, to America’.
Roy DeLoach, a former NAR lobbyist who is about to step down from the National Association of Mortgage Brokers but remain as an outside lobbyist, noted that this is a big deal for it but also understands that everyone in government is looking for some way to increase revenue.
NAR lobbyist Joe Ventrone said he couldn’t comment on the mortgage interest deduction and what the commission might do, but passed on a copy of the trade group’s marketing flyer, which boasts that ’studies show that home ownership has a significant impact on net worth, educational achievement, civic participation, health, and overall quality of life’.
A lobbyist who works for the mortgage insurance industry seemed somewhat confident that NAR, the National Association of Home Builders, and Mortgage Bankers Association would find some way to “squash this thing, kill it in the crib”.
But this lobbyist, requesting anonymity, noted that “if you’re going to make a significant downpayment on reducing the deficit this is one way to go. The bottom line is that you have to increase revenue. It’s going to be interesting to see how this plays out.”
It’s not just the mortgage interest deduction that might be at stake, warns Christopher Cruise, a Maryland-based mortgage trainer.
“From what I hear there’s also talk that the commission might go after capital gains on home sales,” he says. “The one good thing the Tea Party has done is bring the budget mess to the surface.”
For now, the mortgage and housing industries don’t know where the commission will land on any of this. It’s all guess work, but they are honing their defences and plan to pull out this obvious argument – if you kill the mortgage interest deduction you will kill the nascent housing recovery.
As for Fannie and Freddie, the GOP would like to shoot both of them in the head, but many of our elected leaders in both parties are smart enough to realise that if you kill the mortgage giants you better replace them with something. But they haven’t yet figured out what that something is.