A Look Ahead: 2011 Housing Policy Issues

The end of 2010 generated important housing policy-related news. The tax cut extension legislation was signed into law and the Federal Reserve  continued to expand its holdings of government securities and maintained a federal funds rate ranging from 0 to ¼ of percent. As we begin the new year, now is a good time to consider those events and issues that will shape federal housing policy debates in 2011.

Fiscal Policy

Despite the extension of the 2001 and 2003 tax cuts, tax policy debates will once again feature prominently in 2011.

The “tax extender” legislation, H.R. 4853, will reduce tax collections by about $374 billion in fiscal year 2011 (it will reduce tax collections by $858 billion over the next ten years in total). As a result, we expect the federal budget deficit to come in around 9.7% of GDP for 2011 (approximately $1.5 trillion), as compared to an estimated 8.8% of GDP deficit for 2010. 

Given this fiscal environment, public finance issues are likely to be a focus of January’s State of the Union address. It will be interesting to see what tax and spending proposals are highlighted. Some speculation has focused on efforts to lower the U.S. corporate income tax rate.

Shortly after the State of the Union address, another issue will bring fiscal policy to the forefront. The current statutory debt ceiling for the federal government is $14.294 trillion, as set by law in February 2010. We estimate that this limit will be hit late in the first quarter or early in the second quarter of 2011. Congress will therefore need to vote on raising the national debt limit sometime early in the year.

Finally, Congress approved late in 2010 a continuing resolution (CR) to authorize spending for the federal government.  A continuing resolution maintains government spending at current levels and is often used due to a failure to approve the dozen or so spending bills by the beginning of a given fiscal year, as has happened for fiscal year 2011. The CR authorized current levels of spending until March 4, 2010. When combined with the debt ceiling issue, it suggests an early debate on fiscal policy in the new Congress.

Housing Finance Policy

There will also be a number of housing-related finance policy issues in 2011. The administration has indicated that by the end of January it will publish proposals dealing with the future roles and forms of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. This debate is critical in determining the types of mortgage financing available to home buyers.

And final regulations for the Dodd-Frank financial reform law will be under review in 2011. For mortgages, an important element is the section 941 Credit Risk Retention rules. HUD and FHFA will be issuing proposed rules on the new requirements, which include rules that securitizers retain an economic stake of at least 5% of the credit risk they originate. However, the law allows an exception for “qualified residential mortgages,” the definition of which will need to be fleshed out by regulation. Like the future of the GSEs, the application of section 941 could have an impact on the terms of financing for home buyers.