The history of housing and mortgage finance in this country has always been focused in one direction. For at least two hundred years, the policy of the United States has always emphasized that, for the good of the nation, people should own their own homes.

This policy goes back to George Washington and his desire to open the west and populate it with farmers and homeowners. It was the key element in Abraham Lincoln’s Homestead Act. It was furthered by Franklin Roosevelt’s New Deal which established an elaborate system to insure that mortgage funds would be available to fund single family home purchases. It was at the core of Lyndon Johnson’s Great Society program which built even more liberal lending programs that significantly eased the purchase of new housing by people at every income level.

The Millennial generation has reached the age where it is ready to continue the movement toward homeownership. Plus, despite many studies to the contrary over the past decade, this generation now appears to want to own homes.

But, U.S. government policy has changed. In 2010, the Obama Administration issued a joint policy statement written by the Treasury Department and HUD which de-emphasized homeownership in favor of multifamily or rental apartment living. Fannie Mae and Freddie Mac were ordered to make more funds available to the multifamily industry providing more funds to real estate developers who build rental units. The Consumer Finance Protection Bureau wrote new Qualified Mortgage Rules that dramatically reduced the number of households who would be eligible for home loans.

The Trump Administration, which is headed by a past multifamily builder, is furthering the Obama thrust. President Trump has now offered a series of tax policies which would further tilt the government in favor of multifamily construction. The new rules would maintain the legal benefits enjoyed by existing home owners but they would dramatically change the rules for new homeowners or those who purchase another primary dwelling. Many benefits are reduced or in the case of second homes lost.

While making it less desirable for households to buy a different single family home, the tax proposals maintain the benefits of building and owning multifamily dwellings. REITs, for example, would not be restrained by the proposed rules on interest deductions. Plus, the regulations benefitting low income multifamily housing continue to be in place.

What’s more, both the Obama and the Trump Administrations seem to be in agreement to eliminate Fannie Mae and Freddie Mac in favor of a private market solution not backed by the government. This is evidenced by the bills that were introduced in the last Congress before Trump was elected and by recent statements made by Treasury Secretary Mnuchin. If these companies go, and by the Treasury’s rules both agencies must have zero capital by January 1, 2018, the 30-year fixed rate mortgage will become an historical oddity (virtually every other nation has avoided creating this product).

So, what comes next? One can only hypothesize about the future of the housing and mortgage industries since the new tax rules are not in effect and Fannie and Freddie are still functioning. However, assume that the two mortgage giants are cut down and the new tax proposals are accepted. In this scenario the biggest banks would regain control of the mortgage industry. They would place newly originated mortgages in their portfolios. These mortgages would have much reduced terms and much higher interest rates.

Housing prices would reset at lower levels. Household wealth would decline. The economy would be harmed. Big banks on the other hand would prosper and the U.S. mortgage industry would begin to mimic the Canadian industry which is totally dominated by five very successful banks.

Millennials might be forced to postpone buying their own homes. Plus, the mobility of the United States population would be severely reduced. No one would want to move since moving would mean a higher monthly payment on loans and the loss of tax benefits.

All this means the risk of a very significant decline in housing prices is high if the current tax proposals are accepted. If Fannie and Freddie are eliminated and with it the 30-year fixed rate mortgage the decline in housing prices could be as much as 20 percent.

Commentary by Richard X. Bove, an equity research analyst at the Vertical Group and the author of “Guardians of Prosperity: Why America Needs Big Banks” (2013).

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