[REN #178] Trump Picks Wall Street Insider, Steven Mnuchin, for Treasury Secretary

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Real Estate News Podcast #178: Trump Picks Wall Street Insider, Steven Mnuchin, for Treasury Secretary

Senate confirmation will put former Wall Street insider Steven Mnuchin at the helm of the Treasury Department. As chief, he would be in charge of the nation’s finances, policy, banking regulations, and the IRS. His name will also be on every American dollar.

The Secretary of the Treasury is a member of the President’s Cabinet and his primary economic advisor. He helps create economic and financial policy including tax policy, and is in charge of several bureaus including the IRS, the U.S. Mint, the Office of Comptroller of the Current, and the Inspector General… among several others.

Salary for this enormous job is about $200,000 and, the person holding that post is fifth in line for the presidency should something happen to the command-in-chief.

53-year-old Steven Mnuchin (pronounced Men-oo-chin) is known as a Washington insider after 17 years at investment bank Goldman Sachs. He’s also done several things outside that “insider” realm, including the production of Hollywood movies. He started his own hedge fund, and bought and operated the OneWest consumer bank out of Southern California.

He has contributed money to both Democratic and Republican candidates including Hillary Clinton’s campaigns for Senate and her 2008 presidential run. The same goes for President Obama.

CNN reports that Mnuchin joined Team Trump in May as the finance chairman for his campaign, and also made it clear that he wanted the Treasury Secretary job. He reportedly had his deputies all lined up before he was even nominated.

There are several somewhat controversial events in his career:

First, Mnuchin’s mother had invested with Bernie Madoff, and then she died shortly afterwards in 2005. Mnuchin and his brother, who were executors of the estate, withdrew her $3.2 million dollars – long before its collapse in 2008. The fund’s Trustee sued for the money but a court blocked the trustee, and Mnuchin and his brother kept the money.

Second, Mnuchin made a fortune from the mortgage meltdown. As the economy struggled to recover and millions of people were fighting foreclosure, Mnuchin bought California subprime mortgage lender IndyMac. It was one of the leading subprime home loan lenders before it failed in July of 2008. The FDIC agreed to cover most of IndyMac’s losses so when Mnuchin took over Indy Mac in 2009, the bailout helped make the bank very profitable.

OneWest became part of the “robo-signing” scandal”. That, as you may recall, was when foreclosure documents were signed without proper review and banks moved in too quickly to seize homes.

He eventually sold OneWest to CIT Group for $3.4 billion in 2014. He’s been on the CIT board since then but stepped down after his nomination. He also stepped down from the board of Sears Holding Corporation.

So how does Steven Mnuchin plan to carry out Donald Trump’s economic vision?

In a CNBC interview, he said the most important priority is to get the economy moving again. He wants to see the GDP at a sustained growth rate of 3 to 4 percent. His top priority for making that happen is to cut the corporate tax rate to 15 percent.

How would we offset such an enormous tax cut? Mnuchin plans to make it happen by cutting deductions and exemptions that can be claimed against those earnings. He also wants to get offshore money back into the country. A 15 percent corporate tax rate could be a good incentive to get companies to repatriate that money.

Mnuchin says the tax cuts will result in significant tax savings for the middle class but will not actually change much for the wealthy. He says tax cuts at the top will also be offset by fewer deductions and that will result in no overall tax savings among the high-income earners.

Up for reform are itemized tax deductions. That includes the mortgage interest deduction. Trumps proposed tax cut plan would place a $100,000 cap on itemized deductions for singles and a $200,000 cap for couples.

According to a report in Forbes, the cap will not affect a lot of people. It says the average single itemizer deducts just $21,000 and the average joint filer deducts about $38,000. So most people won’t come near the cap.

But it reports that an analysis by the Tax Policy Center shows the cap will raise more than $1 trillion dollars over a decade. It says the lower cap will affect about 160,000 high-income single filers and 230,000 high-income couples.

Another part of the proposed tax overhaul would be a higher standard deductio, which could increase the number of people who forego itemized deductions in favor of the simple standard deduction.

As for interest rates, Mnuchin says he doesn’t expect they will go up much over the next few years. A rate increase this month is expected, but Mnuchin says interest rates are likely to stay low, overall, for quite some time.

He also wants to cut Fannie and Freddie loose from the federal control. Currently, they act as federally-backed insurance for lenders who purchase mortgages and are regulated by the government.. but they are also publicly traded. Shares rose more than 30 percent on news of Mnuchin’s nomination, and the prospect that Fannie and Freddie may gain their independence.

Mnuchin also has the Dodd-Frank Wall Street Reform and Consumer Protection Act in his sites. It was put into place in response to regulate banks that are “too big to fail” after the bank bailout. It has also been criticized as hobbling the banking industry, making it difficult for them to make loans.

On CNBC, Mnuchin said that Dodd-Frank is way too complicated and makes it tough for banks to lend money. Going after Dodd-Frank will be one of his top priorities in order to help get banks lending again.

As for Mnuchin’s time as Hollywood producer, his most recent is a film about Howard Hughes called “Rules Don’t Apply” and is in theaters now. Mnuchin has a cameo role in the romantic comedy as an unnamed Merrill Lynch executive.

Mnuchin has 35 credits on IMDB — that’s the International Movie Data Base. Among them is box office hit “Avatar”, several “X-Men” movies, and “The Lego Movie”.  His encore performance is coming up, in Washington D.C., as Treasury Secretary, if he is confirmed by the Senate.

What does all this have to do with real estate investors?

Mnuchin has significant experience with subprime loans and the subsequent failure of those loans. He would likely have the knowledge necessary to loosen up lending for those who truly qualify, while not creating another mortgage meltdown.

Privatizing Fannie and Freddie could also result in lower interest rates – due to a couple of factors:

More competition generally drives prices down, and in this case, could drive rates down.  And second, more volume would result in higher returns for lenders, which could also help stabilize interest rates and offer more liquidity to the banking industry.

This, of course, is all speculation at this point. What we do know is that there will be many changes in the coming years. Our President-elect’s net worth is based in real estate, so he probably doesn’t want to see interest rates climb. And our possible future Secretary of the Treasury has made a fortune in the loan business, which could also be good for real estate.

Both billionaires have profited from past real estate meltdowns and President-elect Donald Trump has mentioned he’d pick up more distressed assets in a future downturn. If that were to happen, other real estate investors could also benefit from more distressed inventory – as long as they are not the ones in distress. So make sure you aren’t holding property that could decline in value! Namely, that would be overpriced property in bubble markets that doesn’t cash flow.

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