April 1, 2015
The Federal Reserve Bank of San Francisco’s most recent Economic Letter is titled Mortgaging the Future? In it, Òscar Jordà, Moritz Schularick, and Alan M. Taylor evaluate the “Great Mortgaging” of the American economy:
In the six decades following World War II, bank lending measured as a ratio to GDP has quadrupled in advanced economies. To a great extent, this unprecedented expansion of credit was driven by a dramatic growth in mortgage loans. Lending backed by real estate has allowed households to leverage up and has changed the traditional business of banking in fundamental ways. This “Great Mortgaging” has had a profound influence on the dynamics of business cycles. (1)
I was particularly interested by the Letter’s Figure 2, which charted the ratio of mortgage debt to value of the U.S. housing stock over the last hundred years or so. The authors write,
The rise of mortgage lending exceeds what would be expected considering the increase in real estate values over the same time. Rather, it appears to also reflect an increase in household leverage. Although we cannot measure historical loan-to-value ratios directly, household mortgage debt appears to have risen faster than total real estate asset values in many countries including the United States. The resulting record-high leverage ratios can damage household balance sheets and therefore endanger the overall financial system. Figure 2 displays the ratio of household mortgage lending to the value of the total U.S. housing stock over the past 100 years. As the figure shows, that ratio has nearly quadrupled from about 0.15 in 1910 to about 0.5 today. (2)
An increase in leverage for households is not necessarily a bad thing. it allows households to make investments and to smooth their consumption over longer periods. But it can, of course, get to be too high. High leverage makes households less able to handle shocks such as unemployment, divorce and death. it would be helpful for economists to better model a socially optimal level of household leverage in order to guide regulators. The CFPB has taken a stab at this with its relatively new Ability-to-Repay regulation but we do not yet know if they got it right.
- Lottery Allocations and Games for Public Rental Apartments, by Zhan Wang, Jinpeng Ma, & Hongwei Zhang, March 1, 2015.
- Wages, Housing Prices and Commutes, by Tom Mayock, Real Estate Economics, Forthcoming.
- Financial Literacy, Broker-Borrower Interaction, and Mortgage Default, by James Neil Conklin, Real Estate Economics, Forthcoming.
- Is Timing Everything? Race, Homeownership, and Net Worth in the Tumultuous 2000s, by Sandra J. Newman, Real Estate Economics, Forthcoming.
- Option Market-Based Predictors of REIT Leverage Changes, by Paul Borochin, John L. Glascock, Ran Lu-Andrews, & Jie Yang, Georgetown McDonough School of Business Research Paper No. 2577414.
- Rent-to-Own Housing Contracts Under Financial Constraints, by Sanjiv Jaggia & Pratish Patel, March 10, 2015.
March 31, 2015
Federal Reserve researchers, W. Scott Frame, Andreas Fuster, Joseph Tracy and James Vickery, have posted a staff report, The Rescue of Fannie Mae and Freddie Mac. The abstract reads,
We describe and evaluate the measures taken by the U.S. government to rescue Fannie Mae and Freddie Mac in September 2008. We begin by outlining the business model of these two firms and their role in the U.S. housing finance system. Our focus then turns to the sources of financial distress that the firms experienced and the events that ultimately led the government to take action in an effort to stabilize housing and financial markets. We describe the various resolution options available to policymakers at the time and evaluate the success of the choice of conservatorship, and other actions taken, in terms of five objectives that we argue an optimal intervention would have fulfilled. We conclude that the decision to take the firms into conservatorship and invest public funds achieved its short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship led to tensions between maximizing the firms’ value and achieving broader macroeconomic objectives, and, most importantly, it has so far failed to produce reform of the U.S. housing finance system.
This staff report provides a nice overview of the two companies since the financial crisis. I was particularly interested by a couple of sections. First, I found the discussion of receivership versus conservatorship helpful. Second, I liked how it outlined the five objectives for an optimal intervention:
(i) Fannie Mae and Freddie Mac would be enabled to continue their core securitization and guarantee functions as going concerns, thereby maintaining conforming mortgage credit supply.
(ii) The two firms would continue to honor their agency debt and mortgage-backed securities obligations, given the amount and widely held nature of these securities, especially in leveraged financial institutions, and the potential for financial instability in case of default on these obligations.
(iii) The value of the common and preferred equity in the two firms would be extinguished, reflecting their insolvent financial position.
(iv) The two firms would be managed in a way that would provide flexibility to take into account macroeconomic objectives, rather than just maximizing the private value of their assets.
(v) The structure of the rescue would prompt long-term reform and set in motion the transition to a better system within a reasonable period of time. (14-15)
You’ll have to read the paper to see how they evaluate the five objectives in greater detail.
- On March 26th the The House Financial Services Committee approved 11 bipartisan bills designed to help strengthen the economy and consumer choice by “relieving community banks and credit unions from some of the harmful regulatory burden imposed by Washington,” these include:
- Capital Access for Small Community Financial Institutions Act – which allows privately insured state chartered credit unions to apply for membership in the Federal Home Loan Bank System.
- Community Institution Mortgage Relief Act – which mitigates the high cost of regulatory compliance by amending the Real Estate Settlement Procedures Act to direct the CFPB to provide exemptions from the mortgage escrow account requirements of Dodd-Frank and for small servicers that annually service 20,000 or fewer mortgage loans.
- Helping Expand Lending Practices in Rural Communities Act – which provides an appeals process for areas to be designated as rural for the purpose of exempting certain loans from the CFPB’s Qualified Mortgage rule.
- Mortgage Choice Act – which rovides clarity to the calculation of points and fees, allowing more loans to qualify as Qualified Mortgages and increasing options for borrowers.
- Mortgage Servicing Capital Asset Capital Requirements Act – Directs federal banking agencies to conduct a study to determine the appropriate capital requirements for mortgage servicing assets for community financial institutions.
March 30, 2015
The National Low Income Housing Coalition’s latest issue of Housing Spotlight provides its annual examination of “the availability of rental housing affordable to” extremely low income “and low income renter households . . ..” (1) It finds that
- The number of ELI renter households rose from 9.6 million in 2009 to 10.3 million in 2013 and they made up 24% of all renter households in 2013.
- There was a shortage of 7.1 million affordable rental units available to ELI renter households in 2013. Another way to express this gap is that there were just 31 affordable and available units per 100 ELI renter households. The data show no change from the analysis a year ago.
- For the 4.1 million renter households DLI renter households in 2013, there was a shortage of 3.4 million affordable rental units available to them. There were just 17 affordable and available units per 100 DLI renter households.
- Seventy-five percent of ELI renter households spent more than half of their income on rent and utilities; 90% of DLI renter households spent more than half of their income for rent and utilities.
- In every state, at least 60% of ELI renters paid more than half of their income on rent and utilities. (1)
Given that housing affordability remained a problem during both boom times and bust and given that we should not expect another dramatic expansion of federal subsidies for rental housing, now might be a good time to ask what we can reasonably expect from the Housing Trust Fund. Should it be spread wide and thin, helping many a bit, or narrow and deep, helping a few a lot? No right answers here.
- New Jersey Condominium Association files a complaint alleging that the U.S. Federal Emergency Management Agency (FEMA) breached its contracts by failing to pay flood insurance benefits for damage from Hurricane Sandy.
- The US Supreme Court justices are reviewing an Eleventh Circuit decision that allows second-mortgage liens to disappear for Chapter 7 debtors when the first mortgage is undersecured. The justices expressed concern in letting this happen.
- Federal Deposit Insurance Corp. suit against RBS Securities Inc. for $140 million over residential mortgage-backed securities is dismissed as time-barred under recent US Supreme Court ruling in CTS Corp. v. Waldburger.
- UBS Americas Inc. has settled confidentially with Capital Ventures International over alleged $109 million of risky mortgage-backed securities.