This NEW Law that was just passed by the Trump Administration and the 115th Congress is a HUGE turn in our current fiscal and economic policy. The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 was recently passed and it has ALOT of good and bad. The way I see it, it can potentially cause or contribute to our next market crash. If you would like to see or listen to our recent podcast of this new law, here is the link: https://youtu.be/EZQGvUBuO3k
Okay, so let’s set the stage for why I believe this new law could potentially cause a market crash. Something that might be bigger than the 2008… This article isn’t to scare you but I am writing it to prepare you guys for what I believe could be a major devastation to millions of Americans and the global population. Remember 2007-2008? I may have only been a freshman in high school but I can still remember the impact it had on my family and my friends’ family. Following the crash, the Obama Administration passed the Dodd-Frank Act of 2010 which placed new regulations to tighten up the banking industry from making irrational decisions. While the Dodd-Fank Act gave more layers of protections for the consumers and lending institutions alike, it certainly came with some drawbacks to real estate investors, like us, looking to get access to lending products that COULD be used to be build wealth. But… It can also cause damage if used ill properly.
Being a capitalist that most of us are, the regulations that came with the Dodd-Frank certainly slowed down growth and economic activity. There’s always the good and the bad with any changes. With this new law that was recently passed, it relieved many of the Dodd-Frank laws and created exemptions for us, the investors, to take advantage of.
Let’s dive in to the actual law… KEEP IN MIND… I am not an attorney. This is just a commentary and an opinion piece…
(Sec. 105) The bill amends the Federal Credit Union Act to allow a credit union to extend a member business loan with respect to a one- to four-family dwelling, regardless of whether the dwelling is the member’s primary residence. Under current law, a member business loan may be extended with respect to such a dwelling only if it is the member’s primary residence.
Okay, so this section of the law right here is precisely what I’m referring to as one of the biggest fuel to the fire. This section basically opens up more access to lending for the investors out there. Credit Unions around the country weren’t able to extend loans to non-owner occupying purchasers for 1-4 unit family dwelling. Now, with this new law, Credit Unions CAN extend loans and credit to non-owner occupants; allowing us, the investors, get hands on new lending products from the credit unions. The downside to this is that we will see more leverage and lending activities. This almost ALWAYS leads to a bubble and thus, a crash.
(Sec. 209) The bill amends the United States Housing Act of 1937 to reduce inspection requirements and environmental-review requirements for certain smaller, rural public-housing agencies.
This section opens the doors and opportunities for rural housing. It appears that it’s an attempt to attract more investor dollars in some of the rural communities. This certainly impacts me as I have properties in what is classified as “rural”.
(Sec. 504) The bill amends the Investment Company Act of 1940 to exempt from the definition of an “investment company,” for purposes of specified limitations applicable to such a company under the Act, a qualifying venture capital fund that has no more than 250 investors. Specifically, the bill applies to a venture capital fund that has less than $10 million in aggregate capital contributions and uncalled committed capital. Under current law, a venture capital fund is considered to be an investment company if it has more than 100 investors.
This section applies to some of the bigger investment funds and activities than your average joe investors out there but it can certainly create further demand for real estate. There are mid-size Funds, REITS (real estate investment trusts), private equity, etc. that are going to take this new law as a major win as they can expand their capital contributions to do more transactions. In the lense of real estate, some of these larger investment companies are going to be buying real estate, thus creating more demand. When the demand outweighs the supply in the market, it naturally increases the price of real estate. As the price goes up, it has to come back down on a natural economic cycle. With the combination of regulatory relief in lending and the demand to buy more real estate, this is certainly an ingredient for a MARKET CRASH!
I strongly encourage you guys to read the new law and how it’s going to impact you. There are LOTS of good provisions but also alot of potentials for a bubble burst in our market. I can already sense the market picking back up to a boom and recession is just around the corner. This is not an investment advice but I am hearing numerous recommendation that now is the best time to sell your real estate and to buckle down on cash. It’s the best season to tighten up expenditures and be aware of being too overleveraged. This is the danger zone… and you don’t want to be on the highway to the danger zone… (Thanks Top Gun)
Here is the link to the Congress website with the full details of the law: https://www.congress.gov/bill/115th-congress/senate-bill/2155