REALTORS® are gearing up for what is expected to be a busy first three months of the legislative season as a new Congress and new Administration tackle a number of priorities that affect real estate, including tax reform, the Affordable Care Act, regulatory reform, reauthorization of federal flood insurance, and what to do about Fannie Mae and Freddie Mac.
Right out of the gate, the House took a stab at regulatory reform, passing a measure that would give Congress more say in the rules federal agencies propose. The Regulations from the Executive In Need of Scrutiny Act (REINS) would require agencies to send proposed rules to Congress for a vote if they would have an impact on the economy of $100 million or more.
NAR supports the bill because it would increase transparency and help lawmakers ensure the rules are consistent with congressional intent. “Additional scrutiny by elected officials is a good thing,” says NAR President William E. Brown. “And it gives us another chance to weigh in with Congress when it’s looking at these big-ticket rules.”
The House was also considering another bill that NAR sees merit in, the Regulatory Accountability Act. It would require agencies to achieve their objectives at the least cost and to say how their rules would impact small businesses, among other things.
Both bills largely apply prospectively, NAR analysts say, although the REINS Act includes an amendment that would direct agencies to identify a rule for repeal to offset annual costs any time a rule is proposed. NAR analyst say more information is needed on how such a provision would work in practice.
In addition, the administration of Donald Trump could take a fresh look at existing regulations across the board, and that could result in new rulemaking to change provisions that are hurting real estate, including provisions in the Dodd-Frank financial services reform law enacted in 2010 in response to the financial crisis.
NAR analysts say the association might favor easing some Dodd-Frank requirements on community banks, which traditionally provide the bulk of financing for housing construction. Housing starts have been far below what’s needed to meet rising demand, and easing some requirements on community banks could lead to more robust construction lending.
“Anything we can do to make it easier for local banks to allow builders to obtain loans to build homes that our members can sell is good,” Brown says. More houses would also help bring supply and demand into closer balance, slowing rising home prices.
Health Insurance Reform
With the debate to repeal and replace the Affordable Care Act beginning, NAR is prepared to represent the interests of REALTORS® and real estate companies just as it did when health care reform was debated a decade ago, says Brown.
NAR analysts have been monitoring what lawmakers are discussing with an eye to ensuring independent contractors and small businesses retain access to quality policies at reasonable costs. The lion’s share of NAR members buy their insurance in the individual market, which historically tends to be more volatile and expensive than the group market.
NAR would also like to see certain aspects of existing law that benefit REALTORS® remain in any replacement law. These include not letting insurers deny coverage to people who have a preexisting condition, preventing insurers from charging markedly different premiums based on factors such as age, gender, and health status, and allowing people to keep their children on their plans up to age 26.
“We will weigh in at the appropriate time and with the appropriate committees as the process is unfolding,” says Brown. “We are not at the center of this debate, but we will weigh in as needed to help ensure independent contractors and small businesses have access to health insurance that meets their needs.”
Once health care reform is resolved, the new Congress is expected to take up tax reform. NAR’s priority is to preserve longstanding tax incentives for home ownership and real estate investment, including the mortgage interest deduction and property tax deductions. On the commercial side, preserving 1031 like-kind exchanges is paramount.
NAR has made it clear to lawmakers it will resist efforts to eliminate or curtail MID, and it has come out against proposals that have been circulating in Washington for several years that would effectively eliminate the incentive value of the deduction for most home owners by raising the standard deduction.
NAR analysts call proposals to cut most itemized deductions, including for property and other state and local taxes, and doubling or tripling the standard deduction a back-door attack on MID because it would eliminate the incentive for most people to itemize. “It blurs the distinction between renting and owning, and that goes against the commitment the federal government made more than 100 years ago to support homeownership,” says Brown.
NAR estimates that only the wealthiest 5 percent of households would continue to itemize under some of the proposed changes, while currently the bulk of households that take advantage of MID and property tax deductions are middle class.
On the commercial side, NAR is letting lawmakers know that proposals to curb 1031 exchanges will also meet with strong resistance, because the tax deferral mechanism is one of the main drivers of commercial real estate development today. “If that goes away, commercial real estate will be decimated,” Brown says. “That’s something we’re being very clear about with Congress. This provision is to commercial real estate what MID is for residential real estate. We will fall on our sword for this.”
Another pressing priority for NAR in the coming months will be getting the National Flood Insurance Program reauthorized before it expires at the end of September. The last time the program was up for renewal, in 2008, Congress took four years to reauthorize the program under the Biggert-Waters Act. Up until that point, the program was extended 18 times and allowed to shut down twice, which created uncertainty in the real estate industry.
NAR is seeking another long-term reauthorization combined with additional reforms to increase the accuracy of flood mapping, provide financial assistance for more homeowners to mitigate their risk before a flood occurs, and develop a more robust private insurance market.
Although the program is vital to real estate, reauthorization requires an ongoing education effort because many lawmakers believe flooding is more a regional than a national problem. “What many don’t realize is flooding can happen anywhere and we all live in a flood zone to some degree. In fact, flood disasters have been presidentially declared across much of the Midwest over the last 6 months and just about everywhere else over the last 10 years,” says Brown.
The last time the program was allowed to shut down, 30,000 home-sale transactions came to a halt each month, with devastating consequences for the households and the local economies. Flood insurance is required for a mortgage in more than 22,000 communities around the country. NAR is prepared to push for a temporary extension to keep the program open well before the program expires if reauthorization risks getting crowded out in the fall.
Secondary Mortgage Market Reform
Since the financial crisis, government officials have wrestled with what to do about the two secondary mortgage market companies, Fannie Mae and Freddie Mac. They’re integral to home sales because they give lenders a market in which to sell their conventional loans so they can maintain liquidity for new lending.
The companies have been in federal conservatorship since 2010, and although they’re making money again and have even paid back to the Treasury the assistance they received in the wake of the financial crisis, many lawmakers want to keep reform high on the agenda.
NAR has forcefully advocated for years that, whether or not the companies are replaced, there must continue to be a mechanism for lenders to sell safely underwritten, federally backed conventional loans to investors. Not to have that would almost surely spell the end of the 30-year, fixed-rate loans that are at the heart of the country’s successful home sales market, Brown says. “Borrowers’ ability to access safe, affordable, long-term, fixed-rate financing depends on the federal guarantee,” he says.
NAR analysts don’t expect secondary mortgage market reform to be taken up before the fall. “There’s a lot going on, and as long as the companies are doing well, the urgency to deal with them won’t be as high as other priorities,” Brown says. “But it remains important to settle their status once and for all.”
Brown says the work of the reform-minded 115th Congress can have enormous repercussions on how much real estate is bought and sold for years to come, so vigilance will be the watchword for 2017, particularly in the early months. “There are going to be a lot of balls in the air,” he says. “We have to be ready. We will be ready.”