Changes in Washington and How it Could Affect Housing Policy

As I have just passed my 6-month anniversary as RealtyShares’ Chief Risk Officer, I want to establish a regular dialogue with you, our investors. Given that we just elected a new president, let’s start by discussing some of the potential impact that the new Trump administration may have on real estate and housing.

President-elect Trump has not detailed many specifics on housing policy yet, nor was it discussed much during the campaign. It’s unclear what type of Republican he will be when it comes to housing or real estate policy, yet we can make some educated guesses about the likely impact of a Trump administration on real estate and how you can potentially take advantage of these insights through the RealtyShares platform

The impact of the Trump administration will likely be felt through two channels:

1) Regulation: During the campaign Trump committed to reducing regulation. One area where there is a general consensus among republicans was that the Dodd-Frank regulatory overhaul for the financial sector has been a failure at reducing the too-big to fail problem for large financial institutions, and that the Consumer Financial Protection Bureau (CFPB), a child of Dodd-Frank, through regulatory over-reach has constrained credit availability through a large and inefficient regulatory tax on financial institutions.

A reduction in regulatory burden faced by banks and non-bank institutions for consumer loans is likely to result in an expansion of product offerings and an increase in credit available to both consumers and to project sponsors, some of which have been frozen out of the credit markets. A relaxation of the consumer financial regulations will likely make more credit available to consumers to purchase houses, good for house prices. Banks will likely extend credit to more near prime borrowers, being more aggressive at providing financing for investors (both for residential and commercial real estate projects) and may restart offering interest only lending programs more widely to consumers and investors.

“One area where there is a general consensus among republicans was that the Dodd-Frank regulatory overhaul for the financial sector has been a failure…”

To the extent that Federal government regulations prevent development in sensitive areas, the administration may help open up more land for development. This may increase supply, which is not that good for real estate prices, but good for developers. We expect that this impact would be small, as most housing and land use regulation is local and not Federal.

Finally, by having all three branches of government in Republican hands, this may be the election cycle where reform of the housing finance system is possible. The regulatory structure for Fannie/Freddie/FHA may change, and there is a chance that we may get closer to phasing out the GSEs, or at least significantly reducing the subsidy to the housing sector from the GSEs. If that happens, a significant subsidy to the housing market may be removed, which may move mortgage rates up, estimates vary by as much as 25–100 bps. However, this could result in a lot more players stepping into the housing finance system, possibly increasing financial innovation and the menu of products available to finance real estate.

2) Financial Markets & Deficit Spending: Trump has talked about a “huge” effort to upgrade infrastructure through deficit spending. If he moves forward with that, it is likely that in the short term there will be a boost to GDP growth rates and incomes, but that there could also be an increase in the inflation rate and interest rates, especially long term interest rates. If 10-year treasuries go above 3 percent (pushing 30-year mortgage rates close to or above 5 percent), many economists believe that could be the tipping point where mortgage rates will start to hamper home affordability in markets where the house price/income ratio is high. We will likely see pressure on housing markets with a high ratio of house price/income. However, growing GDP should provide offsetting support for markets where the ratio of home prices/income has not been as high by allowing more people to come into the housing market. So we would expect pressure for high end homes, especially in markets that are expensive based on a house price/income ratio, and support for lower price points in all markets as economic growth increases.

Trump is also talking about a pretty large tax cut across the board, but with a large share focused on the wealthy. To the extent that the wealthy have more disposable income, that would offset the hit from higher interest rates, and would support housing prices in areas with high house price/income ratios. I would estimate that GSE regulatory reform could happen later in the administration, if at all, therefore the impacts of the tax cut and commensurate rise in interest rates should impact real estate values earlier.

Now that I’ve given something for you to think about as investors and real estate enthusiasts, I want to change the focus to our platform, and how you can use it to potentially optimize how you take advantage of any investment opportunities in the real estate sector that arise from the changes that can happen in Washington.

What we’ve accomplished as a marketplace lender and a real estate investment and capital formation platform is here to stay. We have pioneered a new more cost-effective way of transferring capital from investors to sponsors and borrowers. We’re doing it in a way that can enhance efficiency and opens up opportunities and asset classes for investors who previously did not have access to nor an opportunity to invest directly in a wide menu of high quality real estate deals. Similarly, we’ve opened up access to capital for sponsors who have access to investment opportunities but historically have not had efficient access to capital.

As a company we must demonstrate that we are ready to handle the coming changing landscape and that we can handle the impact of potentially more stressful economic times on returns in the real estate sector as we get to the late stages of the current economic cycle and as the economy adjusts to the policies and initiatives of the new administration

At RealtyShares, we are focused on doing our part to increase transparency and to improve the platforms utility to our investors. We want to continue being your partner as you strategize on how to take advantage of any changes and investment opportunities that will be created by the new administration’s initiatives and policy changes.

Over the next quarter RealtyShares will be publishing vintage curves for debt deals, and we intend to provide enhanced transparency regarding the performance of our equity deals. We will be providing return metrics for completed deals by asset class. We will make available monthly reports on the delinquency rates of deals that have a regular pay component (debt and most preferred equity deals) and the track record of equity deals that we service on behalf of our investors.

We have significantly enhanced our asset management capabilities, and the impact of these changes should become apparent to you in the coming months. During the past few months, the asset management team size has been increased from two to seven. The asset management team is committed to enhancing the frequency and timeliness of deal updates and deal level reporting (including preparing budget to actuals) and is also set up to handle any workout scenarios should they arise.

We will be publishing our credit policy framework and guidelines, and deal pages will identify any exceptions to our guidelines and the compensating factors that led us to conclude that the deal was well curated and qualified to be posted on our market place. In 2017, we plan to start publishing credit grades for debt deals and augmenting risk factors that we present for all equity deals.

We have improved our investor services capabilities and staffing to ensure that we can process payments, credit accounts, and answer your questions better and quicker than before. We have increased our deal team staff to ensure that you are presented with a wider choice of deals to select from in order to optimize your respective investment strategy.

We’ve also augmented our risk management and compliance functions. We have hired a dedicated Director of Compliance, additional risk management staff, and have established a post-close quality assurance function to ensure that we are focused on the quality of deals that we curate on our platform.

In sum, we are committed to preserving and improving the quality of our marketplace platform and to continue to offer our investors and sponsors accessibility, transparency and efficiency. I look forward to future dialogue with you through this forum including updates on things we’re working on to continue improving the platform.