Biden’s Post-Election Agenda for Financials & Housing

Jaret Seiberg, Cowen Washington Research Group financials and housing policy analyst discusses Biden’s plan for financials and housing. He explores the impact of President-elect Biden in the White House and an expected Republican Senate majority and the implication of a divided government on phase 4 of the COVID-19 stimulus as well as various financials sub sectors including mortgage servicers, commercial real estate, big banks and regional banks, financial advisors, debt collectors, private equity and auto lenders.  Press play to learn more.

Transcript

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Jaret Seiberg:                  Hello everyone. Welcome to our podcast today. I am Jaret Seiberg of Cowen’s Washington Research Group and your host for our show. I’m coming at you post-election with Joe Biden becoming president on January 20th and control of the Senate coming down to two special elections in Georgia, which Republicans seem likely to win. That will give Republicans a 52 to 48 edge, which effectively limits Joe Biden’s ability to enact legislation. What I want to devote this edition of our podcast to is delving into what divided government means for the various sub sectors within financials and housing.

                                         But we have to start of course, with what to expect at the macro level. Divided government is typically what the financial community seeks. You probably have heard that over and over again on the TV network news or in your newspaper. A divided government provides for stable policy as it’s difficult to enact laws without a bipartisan consensus. By definition, that means moderation. The extremes cannot prevail. And generally, markets prefer moderation without wild swings in policy. It’s why I see this election as the best potential outcome for financials and housing.

                                         Yes, Biden has some legislative proposals that we believe would have been helpful. Topping that list would have been a $15,000 first time home buyer tax credit. It really could have boosted housing and the home ownership rate that would have been good for the entire housing universe all the way from originators to realtors to mortgage insurers, to home builders. But the trade off for those types of positive policies would have been a higher corporate tax rate and risk of some onerous legislation, such as making it easier to discharge debt in bankruptcy, imposing a federal interest rate cap and charging a financial transaction tax.

                                         To us, the risk from those types of policies is greater than the upside of a new home buyer tax credit. It’s why what really concerns me is what happens with the stimulus spending and a recovery act. That’s really what Washington is focused on now that we have moved past the election. It is the top item on the agenda as Congress returns for the lame duck session after the election and before the inauguration. COVID-19 cases have been spiking across the country, families feel at risk, unemployment remains high with renters bearing a bigger brunt of the financial burden.

                                         And at the same time, small businesses are struggling to stay solvent. Many are not able to pay rent, which is why we raised concern that COVID-19 would trigger a commercial real estate crisis. Now I recognize that commercial real estate has held up better than some feared, and we have a history of commercial real estate outperforming such as during the financial crisis when there was lots of talk about gloom and doom, and yet commercial real estate ended up holding up relatively well. But we have experienced commercial real estate crises in this country over the years.

                                         The last major one was in the late 1980s and early 1990s as the savings and loan crisis expanded into the Northeast and other markets and really became a commercial real estate crisis. I believe there’s still time to avert such a crisis. It just has to happen soon. That means more money for a paycheck protection forgiving loan program, which is one of the real successes out of the Cares Act, which was the big stimulus that Congress enacted in the spring. That paycheck protection program offered loans to small businesses for companies to make their payroll and to pay rent.

                                         If they brought back their employees, the loan was forgiven. Every version of the phase four stimulus, which is the next one in line for a vote, has included not just reopening the paycheck protection program to new borrowers, but also giving existing borrowers access to a second loan. We see this as critical. If you can get more cash to businesses, not only are they able to pay their rent, which then benefits their landlords, which then benefits the commercial real estate market overall, but you’re also preserving those jobs so that as the COVID-19 crisis eases, people do have jobs to return to.

                                         The risks that we see here is that Donald Trump ends up vetoing the stimulus deal between house Democrats and Senate Republicans. That could delay any assistance for more than two months. It could even stretch to three months. I worry with the virus spiking that businesses can’t wait that long. It would mean the loss of jobs and the trouble really taking off in the commercial real estate market. The positive news though is that we believe Joe Biden would sign into law, whatever stimulus deal House and Senate leaders can negotiate.

                                         So this is just an issue of when it happens. It’s not a question of if it happens. Also, there are some signs that President Trump would sign a deal. If Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi are able to close the deal. It’s not so much that Trump really wants to boost the economy going into a Biden Administration, it’s more the fact that the political pressure and the political downside on Trump vetoing or refusing to sign the stimulus would be so great that it could damage the president’s brand.

                                         And as we all know, the president is very conscious of his brand and the value of the Trump name. And I’m not sure that cutting off potential stimulus benefits to millions of Americans is what he’s looking for as he prepares to leave office. All right. So we spent a lot of time already talking about what could happen before Joe Biden takes over. Let’s now project forward a little bit and think about what could happen after the election. In other words, what parts of financials and housing really are exposed to a Joe Biden victory, and how do we see this playing out?

                                         And the fact is that we see a lot of impact across the sectors. Let’s delve into some of them. For the big banks, banks like JP Morgans, the Bank of Americas, the Citi Groups, this is probably a better than expected outcome. Big banks should enjoy the macro stability that comes with Joe Biden in the White House without the risk of negative legislation, such as consumer bankruptcy reform or that financial transaction tax, or even Glass-Steagall restoration, which would restore the separation between commercial and investment banking.

                                         It also limits the ability to raise the corporate tax and it prevents Biden from naming radicals to run the regulatory agencies, given the need for Senate approval. To us, the exception on this appointment limitation is probably going to be the CFPB where we still see a crusading progressive getting the job. The Senate won’t confirm that person. Then we see team Biden following Trump’s lead by naming an acting director to carry out his orders. The negative in all of this is that the stimulus will be smaller for these big banks, which means the risk of higher credit losses and less economic activity.

                                         Still, overall, this situation should be better for the big banks than the status quo. The same is true for the regional banks. We see this as a better than expected outcome, both because of the reduced risk of onerous legislation, as well as the limited ability to nominate radicals [inaudible] regulators. At the same time though, we think the window is going to remain open for M&A among regional banks, which we believe is important and regional banks much like their bigger rivals get the benefit from that more stable macro environment.

                                         One area where you will see a lot of change is something known as the fiduciary duty rule. This is probably an area with the greatest risk with divided government as we see Senate Republicans as mostly powerless to stop a Biden controlled Labor Department from reviving the original fiduciary duty rule. As a way of background, this was a rule that team Obama put in place as it was leaving power. It would use the threat of class action liability to ensure that financial advisors act in the best interest of their clients when making recommendations for retirement savings.

                                         It would impact rollovers from 401(k)s to IRAs, as well as the selection of what funds you put into your IRA. The industry fought this proposal, arguing that it was going to be onerous, lead to unnecessary litigation and not really produce the benefits that the Democrats claimed. The Trump Administration failed to defend the rule in court, which allowed it to be voided by the courts. And we expect that Biden’s team will revive this proposal. It is a progressive priority, and we expect to see the rule retain the threat of class action liability to force compliance.

                                         That will be a challenge for financial advisory businesses, as well as active management, pretty much anyone involved in managing IRAs and 401(k)s. Another area where we do expect attention is going to be on overdraft fees. As I said, I think the administration overall should be positive for big banks and regional banks, but that’s not across the board on every policy and overdraft fees will be one of those areas where I do think you will see a crack down. You could very well see a progressive crusader like representative Katie Porter put in charge of the CFPB.

                                         Even if the GOP won’t confirm her, you could get an acting director, somebody who shares a lot of her views about cracking down on consumer finance issues and overdraft fees is at the top of that list. It’s why we expect limits on how banks can charge for overdrafts, how much they can charge and how quickly consumers have to repay overdrafts. The goal is to ensure that the repayment of one overdraft does not trigger a new overdraft. In other words, they want to cut the cycle where people get trapped in overdrafts and the overdraft fees.

                                         This is certainly most at risk for banks that rely the greatest on this revenue source. The more diverse a bank revenue source is, the less exposure they have and the less of a threat this crackdown will be. More broadly on the consumer finance side and building off our overdraft comments, expect team Biden to try to exert just dry control over consumer finance through the CFPB. That means a return to regulation by enforcement action with a special focus on servicers. That includes mortgage servicers, student loan servicers, and credit card servicers as well as debt collectors.

                                         Payment companies also are likely to be a target as well as auto lenders, which we’ll see a return of the focus on discretionary dealer reserves and the re-introduction of the disparate impact theory of lending bias. Just a couple more issues to flow through here. One of them is on postal banking. We believe the good news here is that this is not going to happen. It would have required a complete sweep for Democrats to advance plans for the Postal Service or the Federal Reserve to provide basic banking services to all Americans.

                                         Even with a sweep, it would have been difficult. With a GOP Senate, it’s just not possible. Same with consumer bankruptcy reform. Democrats want to repeal changes adopted in 2005 that made it harder for those who have higher incomes to discharge all their debts in bankruptcy. Changing the code really would have required Democrats to repeal the filibuster, which means they needed to have at least 51 votes in the Senate, and that’s not going to happen even if they sweep the two contests in Georgia. On the private equity side, this is probably another industry that’s really going to skirt a broad crackdown.

                                         There had been talked by Elizabeth Warren and some other Progressives of trying to hold private equity firms liable for the debt incurred by their target companies in leveraged buyouts. There’s really no GOP interest in that at all, and we don’t see it emerging from the Senate. There’s also always going to be some Democratic push to impact how private equity firms share information with investors. Again, that just doesn’t seem to be on the Senate GOP agenda. And the fact is that if Republicans were interested in going after carried interest, they would have done it as part of Trump’s tax bill.

                                         The fact that they didn’t tells us it’s not going to be on the agenda there either. Crypto is another area where we do see some negative outcomes here. And it’s more about in some ways the absence of positive change than it is that we’re going to see a real crackdown. If Trump had won, we would have expected Brian Brooks to be nominated and confirmed as the permanent comptroller of the currency. And we saw Hester Peirce as the leading Republican contender to be SEC chairman. Both are crypto experts with lots of experience, and we would have expected them to create a much more positive environment in the US for digital currencies and initial coin offerings.

                                         In our view, Democrats just are not as interested in this. They see consumer and investor protection problems with crypto. And so with less interest, we think there’ll be fewer regulatory changes to try to accommodate these technology developments. One thing, however, that won’t change is a Federal Reserve’s rollout of a digital dollar. That should still be on track for release in a couple of years. On Fannie and Freddie, which is something that we get asked a ton about, a Biden win is definitely negative for Fannie and Freddie, simply because we saw FHFA director Mark Calabria as pushing Fannie and Freddie out of conservatorship and out of government control.

                                         That’s going to be a lot harder to do with the Democrats in power, even if Mark Calabria is able to complete his full term as director. Mortgage insurers, which are often closely connected to Fannie and Freddie, actually they were going to be winners no matter what happened. In this case, we do not think the Biden Administration is going to be able to cut FHA premiums, which means you don’t have to worry about a greater threat from the government-run program to what the MIs provide. And as a result, we think the MIs will enjoy a lot of the upside as team Biden looks for ways to expand the home ownership rate. O.

                                         N cannabis banking and in cannabis legislation overall, we do believe the safe act to provide commercial banking access to companies that are involved in state legal cannabis will become the primary focus for the cannabis industry. And we do believe it could be enacted into law. There is a change at the top of the Senate banking committee with Pat Toomey of Pennsylvania becoming the chairman next year. Pat Toomey is an important change because the prior chairman came from a state where cannabis was completely illegal. Toomey is coming from Pennsylvania where medical cannabis use is legal.

                                         We do believe that there is a strong public safety argument to get cash off the street and into the banking system where it can be better tracked, and we do believe this will become law. Legalization overall, however, is really going to shift from a legislative effort to a regulatory fight. We just do not see Mitch McConnell, the Senate majority Leader, as being willing to advance cannabis legalization on the floor of the Senate. Without it getting into the floor, it can’t get a vote. There is a to administrative process where you could try to reschedule cannabis under the Controlled Substances Act.

                                         That takes years not months or weeks, and doesn’t really result in the same outcome as full legalization. It’s not that it won’t be helpful. It’s just that it doesn’t really eliminate the need for legislative action. That will have to wait until there is a change in control of the Senate. On student lending, there has been some bipartisan agreement on the need for student loan reform, cleaning some consolidation of programs that have rules. But what seems less likely now is broad student loan debt forgiveness. So those with student loans, apologies, but I don’t think you’re going to see that that disappear.

                                         At the same time, I don’t think you’re going to see Republican proposals to limit the amount students can borrow for school advance either. So mostly status quo on this. Just a couple more areas to quickly delve into. Circling back to our friends at the big banks. One thing to watch is the policy on buybacks and dividends. This is mostly done at the regulatory level and most of Trump’s regulators are going to remain in power into late 2021 and early 2022. This includes most of the officials at the Federal Reserve, and it’s why we’re not really seeing much of a change in buyback and dividend policy.

                                         And we’re really looking for the full results of CCAR 2021, which is the big annual stress test. Those results will come out in June, and that’s really going to tell us the story on buybacks and dividends. If you take a step back, there had been talks of legislation to more broadly limit buybacks coming out of the Trump tax cuts. Clearly with the Senate being controlled by the Republicans, we just don’t see that happening. Two more sectors to quickly focus are the credit bureaus. I think they are one of the biggest winners of divided government.

                                         It greatly reduces the legislative risk to the bureaus, and you simply are not going to be able to advance legislation to change how credit reports can be used, to change how long negative events can remain on your credit report, to change the process for disputing debts that are listed on your credit report, and you definitely are not going to be able to get a government run credit bureau enacted into law with the Senate under Republican control. And then on the exchanges, we’re still looking for policies to require Chinese companies to delist from US exchanges if they do not permit the Public Company Accounting Oversight Board to review their audits.

                                         What may change is the focus on how exchanges charge for market data. A lot of this is really going to depend upon whom the president named as the SEC chairman and what that person’s focus will be. We expect that focus will really be on investor protection and not on exchanges. If that’s the case, there’s going to be a lot less pressure here on the exchanges. The one thing to watch though is the antitrust division of the Department of Justice. The Trump Administration began an antitrust investigation into market data pricing by the exchanges.

                                         Those investigations tend to be run by the staff. They tend not to be political and they tend to carry over even when there is a change in administration. And so I certainly don’t think risk is over for the exchanges. So that’s pretty much what we’re expecting across the board out of a Biden Administration. It may not be as pretty as some would want, but at the same time, it could be far more negative for large swaths of the financial services sector. In brief, you basically get macro stability, even though you’re going to have some micro risk to various products and ways of doing business.

                                         On that note, thank you all for joining us for our podcast this month. We’ll be back at you in several weeks with our next edition.

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