When it was all said and done, the voters ushered in change for the 2010 elections exactly as many pundits had predicted: a House of Representa tives that had been sweptinto Republican control, a Senate whose Democratic numbers had been significantly eroded and a president whose stature on the Hill had significantly weakened. The result: gridlock for at least the next two years.

As the well-worn joke goes, Wall Street and Main Street prefer a donothing Washington. However, gridlock is too pat of an answer (although clearly the days of ambitious legislation for the Democratic party and President Barack Obama are over with, for the time being at least).

Even with just the House under its control, the Republicans can affect some changes. It will be a tricky dance, though, warns Andrew Raines of Los Angeles law firm Raines Feldman LLP. For the most part, Republicans are favorably predisposed to the issues dear to the real estate industry's heart, he says. "But they are also highly cognizant of the general populist disgust with Wall Street and financial institutions. They will not want to be seen as catering to this group too much." In the more arcane issues, however, he foresees Republicans taking a freer hand.

The man of the hour is Rep. Spencer Bachus, the Alabama Republican expected to take the gavel of the House Financial Services Committee next year. It is widely expected he is going to do everything he can to soften provisions in Dodd- Frank, the financial overhaul that passed after much controversy. Pundits expect him to target those provisions that caused the most angst with the bill's naysayers. Such tactics might include starving the Consumer Finance Protection Agency of funding, as well as dragging out or steering the rule-making decisions that will ultimately affect how the legislation is enacted.

Chief among these provisions will be the 5% risk-retention measure for commercial mortgage-backed securities. Many in the industry expect this to be relaxed under Republican rule.

"Most of Dodd- Frank allows a tremendous amount of flexibility by regulators so you can see how big the impact of a new Congress will be," says one industry executive who did not wish to be identified. "Most of the Republicans were pushing for more direct underwriting standards as opposed to the skin-in-the-game provision. We will likely see the pressure off the 5% retention." There are other measures that Bachus is likely to target, suggests Ken Fields, with Los Angeles law firm Silver & Freedman. The liability of rating agencies is a big one, considering the sea-change that Dodd- Frank could introduce for the industry. "In general, Republicans are not keen to add liability to any business sector, so we'll see some relief, at least from the perspective of the rating agencies, in this area," he says.

Bachus has also targeted derivates (a sore point in Dodd- Frank) as ripe for rewriting. The financial overhaul will require routine swaps to be traded on exchanges and through clearing houses. Dodd- Frank made some provisions for this use, but opponents have said these exemptions do not go far enough. Critics have estimated that the new rules could redirect as much as $1 trillion from the US economy.

It is unclear how much, if at all, Bachus will be able to affect change without a corresponding Republican law and, of course, Obama's signature. It may be that Bachus will find himself limited to rhetoric on this point, which he has no problem delivering: he has called the measure "overly expansive" and "job-killing."

Another shift in leadership will come at the Subcommittee on Capital Markets, Insurance and GovernmentSponsored Enterprises for the House Financial Services Committee, where Scott Garrett (R- NJ) is expected to take over. With Garrett at the helm, some industry insiders are expecting to see a renewed push for covered-bond legislation. Garrett was the sponsor for earlier legislation to create a US coveredbond market, one industry executive observes, "so we are expecting him to continue to move toward that goal,"

There has been some pushback from government agencies on this issue, namely FDIC chairperson Sheila Bair, who has said she does not want to see distressed assets move to these vehicles if it means the FDIC is left with the worst assets to salvage for taxpayers. Much of this squabble comes down to a turf war, insiders say. Bottom line: with the House in Republican control, there will be more support for covered-bond legislation.

But the biggest and likely most heated conversation in this subcommittee will revolve around the GSEs themselves. Ever since Freddie Mac and Fannie Mae went into conservatorship, Republicans have been seeking to introduce a debate over when to

cut them loose. Earlier this year, three Republicans, including Sen. John McCain (R-AZ), introduced an amendment to the financial reform bill that would require the government to end the conservatorship of both Fannie and Freddie two years after the bill becomes law. It was shot down, of course, but it did include a detailed roadmap on how the GSEs could be phased out with relatively little pain. Observers expect to see elements of this plan reintroduced.

The threat to change the tax characterization of carried interest, always looming over the commercial real estate industry, came very close to materializing in this legislative session. With a Republican House, the chances of it happening now are much lower, says Real Estate Roundtable CEO Jeffrey DeBoer. The greatest period of vulnerability will be during the lame duck session when Congress and Obama turn their attention to taxes. Not that the issue will be completely off the table in January, with the deficit a prime concern now, the tax code will be a never-ending focus for legislators, DeBoer says.

On the other hand, some tax provisions the industry has been lobbying for might well come to pass during the lame duck session, such as the Foreign Investment in Real Property Tax Act. "If something like this were moved across the finish line, we could see burdens on local financial institutions eased and positive benefits for the economy pushed forward," DeBoer says.

The election results will have ripple effects in related policy-making areas, from states' actions to how independent agencies interpret Treasury Department directives. Some of these changes will be subtle, such as the issue of mortgage buybacks by financial institutions.

Bank of America, Citigroup and Wells Fargo are among the institutions that have been hit with lawsuits from disgruntled investors over mortgage securities that they allege were deceptively toxic. In general, the mortgage industry could be on the hook for billions in buybacks or putbacks (which generally refers to the repurchase by issuers ofloans whose nature or handling violated their original terms) at par. One J.P. Morgan survey has estimated the industry's losses at between $55 billion and $120 billion. Other industry watchers say it could be even higher. Needless to say, the banks have reserved only a fraction of what they may ultimately have to payout. Much, of course, depends on how these suits wind their way through court, which is out of Congress' hands.

Congress, though, could have an indirect impact on these suits, especially if budget-conscious, newly elected Tea Partiers insist on reaping benefits from such suits. It has not gone unnoticed that the Federal Reserve Bank of New York was among those investors seeking buybacks from BofA. However, as recent decisions by various judges show, these cases have an uphill battle, with the burden on the plaintiffs to overcome strict legal hurdles.

Speaking of the Fed, there is a good chance this Congress will be far less reverential about the traditional divide between Congress and monetary policy-making. In recent days, Sarah Palin has come out against the Federal Reserve Bank's decision to purchase an additional $600 billion in Treasuries. The Fed cited the ongoing need for quantitative easing in the economy when it announced this measure.

Palin and other critics say it is un clear whether this policy will work, but that it will likely unleash inflationary forces. It would take much to legislate a change in the Fed's role, but rising voices in Congress against its moves may well make the Fed more cognizant of political opinion.

There is reason to be concerned about the Fed's latest initiative, says Neal Elkin, president of Real Estate Analytics. "The theory is that by making additional capital available to the mortgage market, it will broaden the availability of capital at origination and ideally broaden access to a wider range of assets that banks are willing to lend against," he tells Distressed Assets Investor. "But one of the challenges is that additional capital is not going to change the mindset of firms originating these loans. There are still a host of issues preventing the underwriting of assets, and I am skeptical whether this will have a significant impact."

There was one subject that didn't require an election to bring the Obama Administration and Congress together: the suits filed against foreclosures based on inaccurate or incomplete documentation. Neither wants to see a moratorium on foreclosures because of these issues, which are generally seen as isolated.

However, that decision was never quite in either government branch's hands. The state attorneys general, all 50 of them, went ballistic over reports about robo-signers and servicers' other legal shortcuts and have launched investigations parallel to the numerous civil suits that have been filed. The heart of the argument can be found in securitization's heyday when the huge number of deals processed muddied the chain of ownership for banks.

Some of the attorneys general, including the most aggressive one (Ohio's Richard Cordray, a Democrat), were on the ballot. Cordray had become the de facto leader of the 50 attorneys general investigating the banks, and he had been reportedly leaning toward forcing the banks to modify homeowner mortgages as part of any settlement. He lost to Republican challenger Mike Dewine. What Cordray's defeat will mean for this strategy is unclear, but it is unlikely that Dewine will focus on the same issues.

The election results will also boost the confidence of independent regulatory agencies to take different paths than those suggested by the Treasury Department. Indeed, there have been signs of this already, and without the umbrella of protection afforded majority rule, it is certain to intensify. For instance, when the negotiations for the financial overhaul were underway, there were several cases in which the Treasury tried to sway agencies to their viewpoint. One example was when the department tried unsuccessfully to persuade the FDIC to wait for the joint rules under Dodd- Frank before issuing its version of the safe-harbor rule. With beefed up Republican numbers on the hill, the industry can expect such departures from the administration's policies to continue.

GlobeSt.com News Hub is your link to relevant real estate and business stories from other local, regional and national publications.

Instant Insights /

What the Mid-Term Elections Mean to You

Related Stories

Recommended For You