Is Dodd-Frank Doomed Under Trump?

Posted by Bobby Montagne on Jan 25, 2017

We don’t think so. First, some background.

 

Run-up to Dodd-Frank

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was passed in reaction to the Great Recession of 2008, but its origins can be traced to the Great Depression. It was the Glass Steagall Act of 1933 that first separated investment and commercial banking. At that time, the consensus was that rampant stock speculation within the banking industry was one of the main contributors to the stock market crash of 1929 and the subsequent decade-long Great Depression. While Glass-Steagall was effective in breaking up the big banks and creating an era of stability, it was also criticized for limiting competition and fostering an inefficient banking industry.Cracked-brick-wall-with-a-red-house-drawn-on-it-473319594_1735x1735.jpeg

Cracks in the Glass-Steagall armor first appeared in the early 1960’s, when regulators began permitting banks to engage in certain securities-related activities. Congress repealed Glass-Steagall in 1999, but by that time the Act had been effectively circumvented by Federal Reserve Board actions, such as allowing Citibank to affiliate with broker Salomon Smith Barney. The resulting mergers created megabanks with split personalities – conservative commercial bankers versus risk-loving investment bankers. The latter group won, creating an economic boom fueled in part by the housing industry. Banks issued residential mortgages using lax underwriting standards, then securitizing the mortgages into mortgage-backed securities (MBS) that were snapped up by investors. The rating agencies played along by assigning high ratings to securities that later turned out to be junk.

It all ended badly. The Mortgage Meltdown of 2007 saw the loss of hundreds of billions of dollars in securities and real estate, and the

government bailout of banks that were “too big to fail.” Many blamed the crisis, at least partially, on the repeal of Glass-Steagall, while others claimed that the Meltdown would have occurred even if Glass-Steagall was still in place.

Dodd-Frank Enacted in 2010

The “Wall Street bailout” was very unpopular with Americans and instigated the rise of the Tea Party. After a couple years spent debating the issue, Congress passed Dodd-Frank in 2010, a sprawling bill that, while not completely restoring Glass-Steagall, did succeed in changing the nation’s financial landscape. Among its provisions were:

  • The Volcker Rule: Aimed at reducing speculation, the Rule banned depository banks from virtually all proprietary trading in hedge funds and private equity funds, and prohibits conflict-of-interest trading
  • Financial oversight: Created two new agencies to monitor and regulate the health of the economy, and mandated that banks create “living wills” governing their procedures for handling financial distress
  • Orderly liquidation: Created rules to put failing financial institutions into receivership and an industry fund to pay for liquidations
  • Proxy access: Gave shareholders expanded rights to nominate dissident corporate directors
  • Registration: Required managers of hedge funds and other private equity entities to register with the Securities and Exchange Commission
  • Insurance regulation: Created new regulations governing the insurance industry
  • Swaps: Created a transparent mechanism for trading swaps
  • Protection: Introduced a variety of new protections for investors and consumers, including the establishment of the Consumer Financial Protection Bureau (CFPB)
  • Mortgage reform: removed some financial incentives for mortgage originators to ignore a borrower’s ability to repay, plus several other reforms

Trump Administration

As Will McDermott points out in a recent Scotsman Guide article, Trump and the Republican Congress are advocating repeal of Dodd-Frank and neutering the CFPB. However, most analysts don’t expect repeal or even a large change to Dodd-Frank. Instead, Republicans may target specific pieces of Dodd-Frank, such as replacing the CFPB director with a five-person commission.

Dodd-Frank limited investments by traditional banks in real estate (and other assets), which is good for competition among property lenders. Some are worried that Trump will do away with Dodd-Frank but because the big banks have embedded the regulations into their operating systems they will be slow to change back, even if they are allowed to.

According to Jim Parrot, a Senior Fellow at the Urban Institute, “The [real estate] industry is affected by Dodd-Frank and thus affected by any dramatic pullback. It would be expensive and generate a fair amount of uncertainty to try to turn back time now.” He deems it unlikely that we will see any rollback of the TILA-RESPA Integrated Disclosure (TRID) rules or the Home Mortgage Disclosure Act regulations.


 

The recapitalization of Fannie Mae and Freddie Mac would positively affect liquidity in the residential mortgage industry, thereby stimulating sales of real estate investment properties. There is optimism that the Trump administration will be a net positive to the industry, as a whole.


 

Bobby Montagne

Author

Bobby Montagne is a real estate entrepreneur with three decades of experience in commercial and residential property development, finance and sales. Having successfully overseen $15 billion in career transactions, he is among an elite class of real estate innovator that has consistently delivered high quality returns to partners and investors.