As early as 2005, a prescient Janet Yellen foretold that systemic risk in the housing market could send the U.S. economy plunging into a historic recession. Fifteen years later, as Treasury Secretary, Yellen looks likely to get the chance to tackle another recession, one in which the housing market is arguably stronger than ever.
President-elect Joe Biden on Monday nominated Yellen to lead the Treasury Department as Treasury Secretary, where, if confirmed, she will be tasked with spearheading the revival of an economy devastated by the coronavirus pandemic – with 12 million people out of work, slowing job gains, and 3 million homeowners in foreclosure.
Yellen’s nomination is expected to appeal to Democrats, Republicans, and Wall Street – all of which have worked with and expressed admiration for Yellen in the past. She would be among the few Biden cabinet picks likely to pass a nomination hearing with comparatively few bumps and bruises.
“For them, recommending her for Treasury Secretary was certainly a bipartisan gesture in the sense that Biden essentially skipped the opportunity to make a political statement,” said Tim Rood, head of industry relations for SitusAMC. “Janet Yellen is someone I think is universally accepted and admired.”
More critically, a Yellen appointment signals that the Biden administration would push to increase federal spending to jumpstart the economy, lobby the Federal Reserve to keep interest rates low, and slow-roll any Trump administration plans to move the government-sponsored entities out of conservatorship, several mortgage and housing industry veterans told HousingWire.
“Off of a list of incredibly qualified candidates, Yellen is an A-lister on an A-list,” said David Dworkin, president and chief executive officer of National Housing Conference. “Her experience leading the Fed uniquely qualifies her to navigate Treasury in a post-pandemic recovery.”
Dworkin added that, better than most, Yellen is suited to responding to market movements quickly and not getting caught up in ideology.
“A lot of leading Treasury is understanding the markets in the midst of a crisis,” he said. “There are few jobs that really prepare you for that. Having run the Fed, she understands the markets as well as any Wall Street exec ever will. She has a foundation of progressive political instincts that guide her economist perspective, which tends to be more realistic.”
The Yellen playbook, V2
Having had a front-row seat to Barack Obama’s efforts to dig the economy out of the unprecedented 2008 housing market collapse, Yellen has a wealth of experience to draw from during another unprecedented crisis: the coronavirus pandemic, the resurgence of which has led to forecasts of negative growth in the first quarter.
About a month before the coronavirus pandemic sprouted in Wuhan, China, Yellen expressed concern with the state of the U.S. economy. Though she didn’t forecast a recession, Yellen said that the likelihood in 2020 was higher than normal due to high debt levels of corporate America. Today, the more pressing problems include factors such as job losses, and depressed sectors in retail and commercial real estate.
Democrats and Republicans have unsuccessfully negotiated another stimulus package for months, and forbearance is running out for many at the end of the year and in the first quarter.
It’s a good sign that Yellen has a strong rapport with Federal Reserve Chair Jerome Powell, industry insiders said, even if politicians remain at loggerheads for now. It improves the prospect of a deal.
“At some point all the parties need to agree to a stimulus,” said Rick Sharga, vice president of RealtyTrac. “The question is, how big is the stimulus package and who is it earmarked for?”
Even if those broader concerns remain present, Yellen will be presiding over a very different housing market than the one she correctly predicted would go bust in 2008.
While credit standards for home purchases are at historic highs, banks and nonbank lenders alike have strong levels of liquidity, and delinquency rates are relatively low given the broader economic crisis, renters and small-time investors could be in danger.
“In terms of properties where there is a landlord who’s invested in these rental units, Yellen could have a direct impact on propping up that part of the market by providing economic stimulus,” said Sharga.
If nothing else, for the housing industry, a Yellen Treasury Secretary appointment represents a steady hand at the wheel in a highly uncertain period.
“Yellen is a solid pick who can help steer the economy forward, calm the market when necessary and is unlikely to introduce any controversial policy surprises,” said Lawrence Yun, National Association of Realtors’ chief economist. “In regards to the real estate industry, she understands the important role our housing market plays in America’s economic growth and recognizes the societal benefits and wealth building opportunities that homeownership can bring, especially among minority households.”
Yun said he hopes Yellen will place an “equal emphasis” on policy affecting commercial real estate – bringing vibrancy to local communities and turning raw land into developable lots.
“That is especially important in the current environment of acute housing shortage,” Yun said.
Though Yellen doesn’t have a reputation as an aggressive sheriff, she has flexed regulatory muscle in the past. In her last act as head of the Federal Reserve in 2018, Yellen slapped Wells Fargo with a $400 million penalty, punishing the bank for opening accounts in customers’ names without their knowledge. Yellen also delivered sanctions to the bank’s executives.
While a Biden administration is likely to be more active with regard to regulation, Yellen herself probably won’t be cracking the whip much.
“I don’t see a lot in Yellen’s background that she would take CFPB back to a position where they regulate by enforcement as opposed to instruction,” said Sharga.
In an interview at the World Business Forum in New York about a year ago, Yellen described how she and Former Fed Chair Ben Bernanke had just 24 hours to respond to AIG’s collapse, and called the 2008 housing crash as “a run on the broader” financial system.
“Only a central bank could stem that so that credit to the economy didn’t collapse,” she said. “Once we saw it, we had to lend liberally so that they didn’t withdraw credit from households. That understanding motivated us to act quickly.”
Fannie and Freddie find a new dance partner?
Despite historic commission rates and record profits, the next few months will still likely be somewhat nerve-wracking for the mortgage industry.
As the transition of power from President Trump to Biden begins to take form, Federal Housing Finance Agency director Mark Calabria will be in the background attempting to strike a deal with Treasury Secretary Steven Mnuchin to spring the GSEs from conservatorship.
The companies entered conservatorship over a decade ago, and the Trump administration has been vocal about its desire to return Fannie and Freddie back to the private markets, even if the market expresses upset at the prospect of a rushed exit.
Biden’s victory greatly complicates any move to exit conservatorship.
In order to remove the shackles, the Trump administration would be greatly accelerating Calabria’s own timeline from 2022 at the earliest, to less than two months from now.
“It’s unlikely at best, risky at worse,” said Sharga.
“Yellen’s nomination probably takes a little bit of the energy out of any plans Republicans had around more hastily getting the GSEs out of conservatorship,” said Rood, of SitusAMC. “Anything that’s done to get the GSEs out of conservatorship requires tight coordination in concurrence with the Treasury. I’m sure this is somewhat comforting to [Republicans]. It would be a lot easier to make a deal behind the scenes to slow roll getting the GSEs out of conservatorship knowing they’ve got a pretty reasonable dance partner in Yellen.”
The Structured Finance Association, a Wall Street industry trade group representing players in the secondary market, this week issued a rebuke to Calabria’s accelerated timeline.
“We call upon the Treasury to take responsible steps to avoid the potentially destructive effects of releasing the GSEs prematurely,” the group said in a letter to Mnuchin. It later applauded Yellen’s nomination.
“While serving as a senior financial policy advisor on Capitol Hill, I was fortunate to get to know Chair Yellen during her confirmation process and worked with her on a number of different issues,” said Michael Bright, the trade group’s CEO. “She is a brilliant economist and a great leader, and I expect her nomination to receive broad industry support.”
If history is an indication, Yellen as Treasury Secretary would likely roll back any major initiatives by the Trump administration to remove the GSEs from conservatorship should they make progress.
In 2014, Yellen made headlines by delivering, to the House Financial Services committee, a one-minute speech outlining the risks associated with the GSEs and her plan for reform.
“I think we still have a system that has systemic risk, that government funding remains critical to the mortgage sector, and I think to get the housing market back on its feet,” she said. “It’s important for Congress to put in place a new system and to explicitly decide what the role of the government should be in helping the housing sector.”
In that presentation, she pleaded with the HFS to “deal with a reform of the GSEs.”
“There are a variety of ways to do it,” she said. “But I think the government should make its intended role more explicit and make sure that whatever entities are set up to deal with housing finance. Don’t create systemic risks to the financial system.”
Tim Glaze is a reporter at HousingWire. You can write to him at [email protected].
James Kleimann is the Mortgage Editor at HousingWire. You can write to him at [email protected].
