There's plenty of change happening in Washington as a new administration sweeps into power. While the president has been driving the changes, there are a few housing-related items that the new Congress might attend to as well. Some of these issues have been hanging around for years; others have new relevancy. That said, there's little your Congress can do to get more homes available to buy; even considerable incentives to build more homes will take years to have any real impact. There's also no simple way to incentivize existing homeowners to put their homes on the market, or do to so at prices that are more affordable to potential buyers.
Still, there may be some things Congress can or should do, or at least should consider. Here are a few to think about:
No. 1: Release Fannie/Freddie from Conservatorship
Do you remember when Fannie Mae and Freddie Mac were private companies? You would be forgiven if you don't, as that was more than 16 years ago. That's how long the two entities have been in Conservatorship, an arrangement that was never expected to be so durable.
The GSE's regulator -- the Federal Housing Finance Agency - says "Fannie Mae and Freddie Mac are in conservatorship to preserve and conserve their assets and property and restore them to a sound and solvent condition so they can continue to fulfill their statutory missions."
Four presidential and multiple Congressional election cycles have passed since Fannie Mae and Freddie Mac failed and were put into conservatorship. Over the last sixteen years, any number of plans have been floated to "reform" government's role in mortgage and housing markets -- everything from virtually no change to complete overhaul. Many of those proposals have come and gone, and many of those who originally proposed or designed them are out of office, too. However, nothing has been done.
But should they be released? Does it matter? The 2008 Housing and Economic Recovery Act (HERA) actually does requires release of the GSEs from conservatorship. "In the case of a conservatorship, the FHFA is directed to seek to rehabilitate the troubled entity for the benefit of its shareholders and creditors by preserving the entity's assets and improving its business operations in order to restore the entity to a sound and solvent condition."
Inasmuch as they are functioning, profitable and sending billions into the Treasury (or retaining it to build their capital levels), the GSE's probably don't need to be reformed per se. But they should probably either be released back to private control or converted to a government department or utility. That said, there is a "if it ain't broke, don't fix it" kind of mentality at play here; it is true that the GSEs are functioning, but also true that except for a few niche markets, they have crowded out the truly private mortgage market.
As the GSEs are the dominant players in housing finance, any change that affects the functioning of the market needs to be done in a measured fashion. Anything that raises the costs of home financing or limits access to mortgage credit probably isn't a direction in which anyone really wants to go, and the essential issue is whether the government will or will not be the ultimate backstop for the mortgage-backed securities the enterprises create and sell.
Since a Republican majority is in power, it's certainly possible that something like reform might make it through, as was the case last time. Over the last four years, Democratic majorities failed to press any change at all into place, so it would appear the status quo was the preference. Regardless of who picks up the mantle of change (or not), the fact of the matter is that there is no viable alternative to Fannie and Freddie that’s ready to go.
If anything, Congress might consider combining the two entities into a single one, allow them to carry just enough capital as to be considered solvent again and remove them from conservatorship. Any "excess" capital might be used to purchase or subsidize mortgages made to low-to-moderate income borrowers or other "risky" portions of the market, helping to promote sustainable homeownership, or reallocated to help offset rising or high costs for homeowners. Of course, doing this would prove a daunting challenge even for a unified Congress, making this sort of outcome unlikely.
With regard to true reform, our guess is that nothing happens, regardless of who's in. That's not to say that there aren't things that can't be done. Lowering the conforming loan limits to expand the amount of the market that can be served by private entities and interests might be a place to start. As well, lowering or modifying some of the Loan-Level Pricing Adjustments (LLPAs) put in place by Fannie and Freddie over the last few years might help lower costs for certain qualified home buyers, and increases in guarantee fees imposed over the last few years might be rolled back a little, lowering costs for all borrowers.
No. 2: Update the Capital Gains Exclusion on Home Sales
A lot of change can happen in 28 years, but seemingly not to an old piece of the tax code. Way back in 1997, the current exclusion of $500,000 (married filing jointly, $250,000 single) in capital gains from the sale of a qualified primary residence was put in place. It has never changed. With home prices running strongly upward in recent years, it's likely that more homeowners will find themselves with a sizeable tax bill when its time to sell.
Way back in 1997, the conforming loan limit was just $214,600; today, it's nearly four times that much ($806,500). It if had been indexed for inflation, that $500,000 home-sale capital gain exclusion limit from back in 1997 would be over $983,000 today.
It's not just conforming mortgage amounts that have leapt over the last nearly 30 years; home prices of course have also risen appreciably. It's hard to find a good reckoning of home values from 1997, but a brand-new home back then averaged $145,000, and it's reasonable to think that the average median price for an existing home was somewhere around there, too. Today's median values (whether existing homes or new) are easily three times 1997 levels.
With the average homeowner holding a property for about 13 years, there are many more folks finding that they owe Uncle Sam when they sell a home. CoreLogic estimates that about 8% of U.S. homes sold in 2023 exceeded the capital gains tax limit of $500,000, affecting about 230,000 home sellers. Sales activity was fairly muted in 2023 and again in 2024, but home values continued to rise, so the number of folks facing a tax liability when selling is only likely to grow in the future.
The maximum exclusion amount doesn't necessarily need to be adjusted all the way up to a current fully-inflation-adjusted figure, but what was once a generous allowance is now considerably less so, so it's probably time for at least a tweak to the limit to something closer to modern times and values.
No. 3: MI Tax Deduction
On again and off again, Congress has never permanently authorized the deductibilty of mortgage insurance premiums. These costs are based on the credit score of the homebuyer, the type and term of the loan chosen and other variables. Importantly, they are calculated as a percentage of the amount being financed rather than a fixed dollar amount, so as home prices have risen, so has the actual dollar cost of PMI or MI premiums.
For most homeowners, it's not as though PMI costs add all that much to the cost of owning a home, or that the ability to deduct their premiums would provide a significant break for homeowners. When the deduction was last available, PMI premiums were treated the same as mortgage interest, and so were only deducted by those who itemized their returns. With the 2017 Tax Cuts and Jobs Act changes to the tax code, the higher standard deduction meant far fewer folks for whom itemizing made sense, so even if MI costs were again made deductible the benefit would probably be realized by relatively few taxpayers. That means it won't "cost" the government very much in revenue. It's also worth keeping in mind that homeowners have cost incentives to cancel MI as quickly as is possible, so any deductions for MI premiums by homeowners will likely have a built-in sunset, too.
While the benefit of deducting MI premiums probably doesn't add up to all that much, it would mean slightly lower costs for some homeowners in some places, most likely in the early years of a loan, and provide a permanent answer to a question that arises at tax time every year.
No. 4: Flood Mitigation Credits or Offsets
Without opening up the discussion as to the causes, it's reasonable to think that we can all agree that severe weather events cause both catastrophic and widespread damage. Whether hurricanes, atmospheric rivers, 100-year rain events or rising sea levels, the prospects for extraordinary and costly damages from water do seem to be on the rise.
Flood insurance is available from the government, of course, but it is expensive, and rarely carried by homeowners in places where such catastrophes are infrequent. However, in places where such flooding is or is becoming more routine or repeated it might be a good idea for the government to provide incentives to help prevent or mitigate the effects and costs of flooding. These might include a range of programs that include credits or offsets to the cost of raising homes, buyouts of flood-prone properties or areas, post-event relocation costs and other such measures.
Since the incidence of widespread flood events and their associated costs seems likely to only increase over time, it may be most cost effective to work to prevent losses from them rather than simply try to insure against them.
No. 5: Homeowner's Insurance Deduction or Backstop
In a similar vein but perhaps one with even broader impact, the cost of homeowner's insurance is rising both quickly and appreciably, and coverage for some folks isn't available from private insurers any longer. For some, the cost of coverage is more than the rest of their mortgage payment, and there are stories in the press about homeowners who no longer have mortgages going without coverage, risking financial ruin in the event of a catastrophe.
Since virtually all homeowners with a mortgage are required to carry a homeowner's policy, perhaps it may be time for Congress to consider a means of offsetting some of the cost of a homeowner's insurance policy, perhaps in the form of a tax credit. Such a thing could be made available in locations where typical costs exceed a given threshold or can be limited to those meeting certain income requirements (or have a scaled credit available as incomes rise).
In his recent semi-annual monetary report to the Congress (nee "Humphry-Hawkins") testimony, Fed Chair Powell noted that "If you fast-forward 10 or 15 years, there are going to be regions of the country where you can’t get a mortgage," as insurers withdraw from regions at high risk for natural disasters.
While considering the arrangement of a federal hazard insurance backstop (ala the National Flood Insurance Program), Congress could consider helping homeowners (and potentially renters) with the high and rising cost of homeowner's insurance. This could be done by allowing homeowner or renter premiums to be either partially or fully deducted from taxable income. It's worth considering that this isn't just for folks in coastal areas, in river valleys, or locations prone to wildfires; some of the most expensive routine disasters happen from tornadoes and hailstorms, for example.
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There is no doubt that some of these thoughts may carry sizable price tags or disrupt the home financing market in unexpected ways. Perhaps the thing to do is to leave Fannie and Freddie as is, as wards of the state, and re-funnel some of their billions in profits as an offset to these costs. Better preparing for the eventuality of costly disasters should help reduce their misery and cost at a later date, and that's something your Congress might consider. As well, any measures or tax policies that help to reduce the on-going costs of owning a home (or letting one go) are likely to be welcomed, especially if some or all of their costs can be borne by the existing structures of the housing market.
