Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Jaret Seiberg:
Welcome to Two Cents, the financials podcast at TD Cowen. I am Jaret Sieberg, managing director and financial services policy analyst at TD Cowen Washington Research Group. Today, we're going to do a deep dive on housing policy, given action on Capitol Hill and from the White House. Yet I want to start first with Scott Smith. My partner here at TD Cowen, who is our specialty salesperson for financials. So Scott, what should we expect from the markets?
Scott Smith:
So Jaret, I know you're a baseball guy, so I'm going to pull a Phil Rizzuto on you and say, "Holy cow." It's been completely crazy in the financial space since we last conversed on this podcast. We've had the AI trade ripple its way through the entire financial services space. It started out with questions about software and software investments, which hit the alternative asset managers fairly significantly. It moved into insurance with questions about whether underwriters and insurance brokers were going to be disintermediated by AI.
It moved into banks where people became concerned about whether AI agents were going to start moving consumer and corporate deposits around from one bank to another with instant settlement. And wherever the deposits were going to settle was with whoever had the best rates. And so, that made people concerned. And then, ultimately, it hit the consumer finance names when we started to have negative headlines on the employment side from a couple of companies that talked about the size of employment reductions they'd be able to undertake courtesy of AI. And that led people to wonder whether we were going to have an employment situation that was going to create some risk for consumer finance names.
Post all of that, obviously we've had the Iran war get started, which I don't think anyone in the financial services arena had in their bingo card. And then, obviously, we've also had the FOMC and the Basel III Endgame, the latter of which I think people construed as constructive, but it will take a little bit of time to digest.
Jaret Seiberg:
So Scott, we're only a few weeks away from the start of the next earning season. How do these last few weeks before earnings typically play out?
Scott Smith:
It's a fairly well established trend that the financials sell off after JP Morgan reports. I think if you go back multiple, multiple quarters, you can see that that has held true over time. So there's a little bit of caution, but at investor conferences that have taken place recently, the commentary on loan growth and the commentary on credit quality continues to be pretty constructive. So outside of the macro AI risk, as well as the inflation risk, the core of what we're going to hear from financials is generally reasonably constructive.
Jaret Seiberg:
So we've talked a lot about banks and credit and those types of issues, but we do cover a broader universe. I was wondering, I know that there's been some headlines lately on the insurance front. Anything really grabbing your attention there?
Scott Smith:
So there was a huge insurance conference a couple of weeks back that was incredibly well attended. It's an industry event. And generally speaking there, the commentary was as we had expected, which is that pricing continues to be a little soft. And there are some questions starting to pop up about whether there are risks in insurance company investment portfolios because of what we've seen at the alternative asset managers and some of the credit issues that have surfaced there. There was obviously a UK mortgage lender that went bankrupt a couple of weeks ago, which furthered the concern in that sector. So there's a little bit of concern coming out across insurance, but at the moment, it still seems to be relatively speaking safe, although people are still trying to figure out what the AI risk could be there.
Jaret Seiberg:
So one of my favorite topics for our podcast has been tokenization. We've done a couple of episodes looking at the tokenization of equity securities. We've brought in our colleague, Reid Noch, for a couple of those, but I wanted to turn to you on the tokenization question. How excited or not excited is the market about the prospect of equity securities being tokenized and the idea that we could get to a world where we have instant or near instant settlement?
Scott Smith:
It's interesting. You, as you highlighted, have done quite a bit of work on it. When you all published your report talking about tokenization being real and immediate, we got a lot of incoming from clients who said, "Thank goodness someone is actually saying this because it seems like most people still think this is a ways off." So it is clearly forefront for a lot of investors. What's not 100% clear for anybody yet is exactly how it's going to play out. I know you've spoken to whether the model was going to be an ADR type of model or just a complete replacement model. There's questions about how you treat the business when some securities are tokenized and some are not, and whether it all has to happen together or how it'll work when there's an intermediate solution. So it's very topical and I think the actual nuts and bolts about how it's going to play out are still being debated pretty hotly.
Jaret Seiberg:
So maybe that leads me into my last set of questions for you, Scott. We do look at alternative asset managers and the exchanges. Our colleague Bill Katz covers that space. Is there anything on that front that we want to let our listeners know?
Scott Smith:
Well, people are now, because of recent headlines, paying a lot more attention to 24/7 or whatever that's going to be trading and what the implications of that are going to be. I think there are some pluses and some minuses. Securities lending in particular has been a focus to the potential negative side, but as well as questions about how you're going to handle news, breaking news and et cetera. But I think most people's view is that the vast proportion of the volume will generally take place during what'll be close to normal market hours or old school market hours. It'll still be worth seeing how that all plays out over time. And certainly within all the volatility, we've seen one of the places where investors have been hanging out is in the exchange names to try and capitalize on that volatility.
Jaret Seiberg:
Just to be clear, am I going to have to stay up 24 hours a day, 7 days a week just to stay on top of the market?
Scott Smith:
Jaret, it seems like every Friday post Thanksgiving, some company or another thinks that's an awesome time to sneak out a negative news announcement. It feels a little bit like you may see that sort of thing happening where somebody will try an off market hours, a release of some news. But I think in general, the expectation of investors is that the vast proportion of the volume will take place pretty much within the old market hours, although there will probably have to be some news break built in there somewhere, but I don't think you'll have to be up 24/7.
Jaret Seiberg:
All right. Maybe slightly good news for us then. Scott, thank you as always. I do appreciate you joining us on the podcast. Let's switch now to the main event, which is housing. So we put housing on the front burner for this podcast because we've had action at both the congressional level and at the presidential level. The Senate recently voted 89 to 10 in favor of the 21st Century Road to Housing Act. Key provisions include the elimination of the permanent chassis requirement for manufactured housing. I know that doesn't sound sexy, but it's a really big deal. It can be a big boost to the construction of entry level manufactured housing. We're also seeing some relaxation of FHA barriers to modular construction financing. There is going to be zoning reforms in there, including grants for communities to create so called pattern books, which are home designs that are pre-approved as being local zoning code compliant.
And then, we have the big controversial piece of this, which is the president's prohibition on new purchases of single family homes for use as rentals if the buyer is an institutional investor, which is defined as someone owning at least 350 houses. There are exceptions in this and you can see some built to rental properties continue to be developed, although there is a possibility that these units will have to be divested within seven years. The fact that this bill made it through the Senate with such a large bipartisan backing tells us that it is likely to become law. We saw a similar measure make it through the House a few months ago. I will say there is some House Senate fighting over the exact details of the bill. The House version also included some bipartisan community banking reforms. Those are not in the Senate version. As of now, the House is still holding firm and asking to begin formal negotiations with the Senate.
I think that's probably unlikely. And I think what's more likely is that the President starts to weigh in more firmly on this legislation and pressures the House to go along with the Senate version of the bill. And some of the House provisions that were left off find a path to enactment as part of other legislation, including potentially the National Defense Authorization Act, which is the one big bipartisan bill that Congress does every fall. It's not just Congress that's tackling a lot of this. It is also the Trump administration itself. They put out two executive orders recently on housing. One deals with mortgage access. It directs the Consumer Financial Protection Bureau to reform mortgage lending rules, to encourage small banks to make more mortgages, includes changing the Home Mortgage Disclosure Act requirements. This is a reporting rule that banks often argue is quite burdensome. It tells regulators to ease their guidance to focus more on prudent underwriting and less on process oriented approaches to lending.
They also want to see a lot more support for community bank construction lending. I do think that could be a real positive, and it calls on the Federal Housing Finance Agency to expand access to longer dated federal home loan bank, financial advances to banks that are tied to residential mortgage assets, and to create liquidity programs for entry-level housing, owner-occupied purchase loans, and small residential builders. All of this is designed to both increase the supply of entry-level homes and to make it easier for borrowers to afford those homes.
The second order that we got from President Trump deals on the home construction front, and that order tells the regulators, including HUD, to eliminate unduly burdensome rules that constrain residential development and housing affordability. It directs the Environmental Protection Agency and the Army Corps of Engineers to review stormwater, wetland, and water-related permitting requirements in an effort to reduce building costs, and it instructs federal agencies to provide incentives to state and local governments that adopt development and zoning reforms that curtail green building codes, reduce design mandates, and enable innovative construction methods, which we believe also will include a lot of modular housing.
So that's a lot for Washington to try to do on housing. So what's really going on here? I think there's a couple of things to keep in mind. We wrote in 2025, a big note that housing is a political priority for both parties and that a party that ignores housing is going to put its election prospects at risk in 2026. What we saw with the One Big Beautiful Bill, which was the big reconciliation package that Republicans pushed through last year, is there was a lot of focus on many parts of the economy, but not much on housing. And in fact, a program that we believe could have been quite helpful on the housing front, a tax credit for the construction of entry-level single-family housing, so called workforce housing that was left off of the package.
And so, I think what Republicans have come to realize as we moved into 2026, and we got closer and closer to the November midterm elections, is that in fact, voters are upset about housing. They do feel that costs of housing has gotten out of control, that it is unaffordable, and therefore there is a strong effort to be seen as doing something to help. I do think the provisions, both in the executive order and that Congress is considering are useful. The problem is that the lag time between these things being put in writing and actually producing help is enormous. It could be three or four years before we see any real impact from changes to environmental rules, before we see communities that have pattern books, before we see local zoning become more accommodating to modular housing. So none of this is going to happen quickly.
It's why I do think as the election gets closer and closer, the White House is likely to turn back to housing, is likely to look for some more immediate impacts that it can try to do to excite voters. I think a couple of options that are still on the table include looking at something that's known as loan level pricing adjustments. These are extra charges that are imposed on a mortgage that reflect a borrower's risk or the risk that a borrower will default on the loan. We think those could be curved temporarily that could bring down monthly housing costs and help people afford houses. I think there could be some changes to FHA pricing to bring down monthly costs as well. And then I think you will see some focus on the credit bureaus and credit scores looking for ways to try to bring down some of the closing costs.
None of these changes are monumental. They're not going to radically change the direction of housing, but they will be helpful at the margins. And I think really what the White House is going to be counting on is that they're going to get credit for at least trying to help voters deal with what they identify as one of their biggest policy concerns.
All right, enough on housing. Let's talk about what's coming up this month as part of our regular wrap up of this podcast. We still have a bunch of hearings set for March. On March 25th, House Financial Services is going to do a hearing on the tokenization of securities. As we talked about at the top of this podcast, that is certainly a big topic for us. I do think tokenization of equity securities is imminent, and I think this hearing's going to give us a lot of insight into what that could look like. We also have a House Financial Services hearing on March 26th, looking at financial innovation. That same day, House Financial Services looks at the high cost of flooding. I expect that's going to delve deeply into flood insurance. That is a politically tricky issue. It's not really partisan and prior efforts to do flood insurance reform in Congress have really not gone well. It's certainly something that we're going to be watching.
Other things coming up in the next couple of months, we have the fight to confirm Kevin Warsh as the Federal Reserve Chair. Right now, Senator Tillis continues to have a block on that nomination. It's why I do expect that Kevin Warsh will get a confirmation hearing before the Senate Banking Committee in the next month or so, but we're unlikely to get a vote until Senator Tillis drops his objection. Tillis is objecting because the Department of Justice has opened a criminal investigation of Federal Reserve Chair Jerome Powell over his testimony regarding renovations to two Federal Reserve buildings. A federal judge recently concluded that the subpoenas, as part of this investigation, were invalid because this was a fishing expedition and they did not have any evidence that a crime was committed and he suggested that this could be political retribution because the President has objected to the Fed's conduct of monetary policy.
In short, this process is getting very messy. I expect it will get even messier, although ultimately I do expect Kevin Warsh will be our next Federal Reserve Chair. A few other things to be watching. We're waiting for the Supreme Court to rule in the Lisa Cook case. Governor Cook is on the Federal Reserve Board. The President has tried to remove her for cause, and the Supreme Court is assessing what the president's authority to act on that front is. A couple other issues just to flag. We're waiting for the SEC to propose optional semi-annual reporting for public companies. This would give companies the ability to report twice a year rather than four times a year on their earnings. We're also looking for an SEC proposal on foreign private issuer eligibility, which could impact Chinese companies that are listed in the United States, and we still have the push on crypto market structure legislation in Congress.
I do think the window for action on that extends well into summer, and so I expect that will be in the headlines over the next several months. With that, I think we are going to wrap up this edition of the Two Cents Podcast. Thank you to Scott for joining me as always, and we'll be back at you next month with the latest in financial policy. Thank you all.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.
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