There is considerable unease in the housing and community development world about the future of federal policy, including support for vouchers, fair housing, and other critical policies and programs. While the choice for secretary of the Department of Housing and Urban Development (HUD) seems an odd, unqualified one, it may be the second-tier appointments that say more about the possibilities for benign or malign neglect at HUD going forward. But there are other appointments and other agencies that have serious implications for the future of housing and the economic prospects of neighborhoods and communities. Chief among these is the Department of the Treasury, arguably the single most important federal agency when it comes to shaping policies that affect the economic prospects of working families and communities.
President-elect Donald Trump has nominated Steve Mnuchin for treasury secretary. Mnuchin is a hedge fund manager and an alum of Goldman Sachs, where he was involved in its mortgage-backed securities business during the mid-1990s when the private-label securitization of subprime lending began hitting its stride. Mnuchin was also involved in the 2008-2009 FDIC-enhanced purchase of the failed Indymac Bank, which was one of the largest depository failures in U.S. history. With the safety net of an FDIC loss-sharing agreement, in which the FDIC protected them from the bulk of ongoing losses, Mnuchin and his colleagues purchased Indymac under the One West name. Mnuchin managed the bank during this period, later selling to the CIT Group, making himself and his partners a very nice profit, and he took a seat on the board of CIT. In the meantime, however, OneWest achieved a reputation as a sometimes ruthless forecloser and was implicated in the 2010 robosigning foreclosure scandal. The California Reinvestment Committee (CRC) has documented a number of questionable practices by the bank both before and after CIT acquired it, including aggressive “dual-tracking” of foreclosures, bank branch locations that avoid minority neighborhoods, and making far fewer loans to Latino and African-American borrowers than the average bank in its area. CRC mounted a strong, but ultimately unsuccessful, challenge to the acquisition by CIT. And in 2016, together with Fair Housing Advocates of Northern California, CRC filed a Fair Housing Act complaint against the bank with HUD.
Mnuchin does not appear to lack knowledge of financial engineering and restructuring, and he clearly has direct experience in taking advantage of government financial assistance as evidenced by the handsome profit from purchasing Indymac. What he does lack, however, is exposure to public service. While other Goldman alums have taken the helm of the treasury department in the past for both Democrats (Robert Rubin) and Republicans (Henry Paulson), they had some experience in public service before landing the top job at the treasury.
Treasury is a key department for housing and community development. It houses the CDFI Fund, which funds community development financial institutions, allocates New Markets Tax Credits, and sets policy for both programs. It also plays a major role in setting consumer finance policy and promotes access to small-business financing. And, of course, the treasury department plays a major role in overall domestic macroeconomic policy, which sets the broader context for the economic prospects for local communities and families.
But the department is also the lead agency for shaping three key areas of policy that could affect housing markets and neighborhoods for decades going forward. Mnuchin has already indicated that high on his to-do list are: lowering corporate tax rates, modifying the Dodd-Frank Act, and the full privatization of Fannie Mae and Freddie Mac.
Mnuchin has recently spoken about wanting to lower corporate tax rates dramatically, from 35 to 15 percent. For housing, such a decrease in corporate taxes would cause a large decline in the demand from investors for Low Income Housing Tax Credits (LIHTCs). This could translate into far lower prices for affordable housing developers when they sell tax credits, meaning far less funding for affordable rental housing.
Treasury will be the lead cabinet agency in any moves to weaken the 2010 Dodd-Frank Act. The act is a wide-ranging set of laws and attendant regulations that include the ability to repay (ATR), and qualified mortgage rules that put the onus on lenders to assure that they do not make loans that homeowners cannot afford, requiring them to underwrite loans responsibly. As the subprime crisis showed, reckless, high-cost lending hurts borrowers, neighborhoods, and cities. Foes of Dodd-Frank have already tried to weaken the law, but the Obama administration has held fast, committing to veto any bills that might make it to the president’s desk. The single most critical achievement of Dodd-Frank, and arguably one of the key achievements of the Obama administration, is the Consumer Financial Protection Bureau (CFPB), which issues mortgage and other regulations that protect vulnerable homeowners, but also other consumers vulnerable to payday loans, mandatory arbitration, and other abusive loan products. Some in Congress aim to simply eliminate the agency, although critically weakening the agency through piecemeal legislation is another possible approach. Fortunately, homeowners and communities have some allies at bank regulators, including Federal Reserve Governor Daniel Tarullo and OCC chief Thomas Curry, who have warned against weakening Dodd-Frank since the election. But these advocates for the CFPB and Dodd-Frank have their work cut out for them.
Another major policy that Mnuchin and the treasury department will have great influence over is the future of Fannie Mae and Freddie Mac. He was quoted recently as favoring a “recap and release” strategy of returning the two mortgage giants back to the private sector after effectively allowing them to retain a greater share of earnings, rather than returning those earnings to the treasury, which rescued the firms from oblivion in 2008. Combined with any weakening of Dodd-Frank, turning Fannie and Freddie to the private sector will simply pave the way for a repeat of the calamitous mortgage market that was driven by privatized secondary markets in the 2000s. These firms will remain too big to fail and so, once again, the upsides of the secondary market will flow to the firms’ owners while the downsides will flow to taxpayers. Some other proposals in Congress, especially the PATH Act sponsored by Congressman Jeb Henserling, also seek to privatize the secondary mortgage market, though by other means.
The only good solution to the future of these firms, which has been recently endorsed by a number of housing finance experts, is to convert them into a single, government-owned corporation. This will ensure fair mortgage access, control market risk, and give taxpayers the upsides, as well as any downsides, of the market, which will be more stable under this structure. Most importantly, it will prevent reckless lending and high interest rates for lower-wealth borrowers.
The treasury department may not be the agency that many folks in housing and community development spend a lot of time thinking about. This is understandable. Nonetheless, the agency is a key driver of a whole host of critical policies that shape local economics and housing markets.
Image: Courtesy of Scott, via flickr, CC BY-NC-ND 2.0)
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Dodd Frank is a horrible law for anybody who actually works in a business that needs to access a financial institution for various transactions. There are countless and I mean countless forms and limitations that a business has to go through with the financial institution.
Dodd Frank may have had some good but there is an equal and probably larger amount of bad. I feel that people focus on the good or the bad depending on their political bent.
As a side note, this article kind of shows the claims of crony capitalism. Look how much government is involved in almost all the critical aspects of our economy today.