November 17, 2014

FHA’s Financial Health Looking Up

By David Reiss

HUD has released the Annual Report to Congress Regarding the Financial Status of the Mutual Mortgage Insurance Fund Fiscal Year 2014. It appears that things are looking up for the FHA, particularly after last year’s mandatory appropriation from the Treasury, the first in the FHA’s 80 year history. For those of you who are not housing finance nerds, the Mutual Mortgage Insurance Fund (MMIF) is the financial backbone of the FHA’s single-family mortgage insurance program.  When it is in bad shape, the FHA is in bad shape.

As Secretary Castro notes in his forward to the report,

The value of the Fund has improved significantly, now standing at $4.8 billion. The increased economic value represents a capital reserve ratio of 0.41. This improvement shows tremendous progress, especially considering that the Fund had a negative value of $16.3 billion just two years ago. The two-year gain in Fund value is an impressive $21 billion. The performance of the portfolio has improved dramatically in a short period of time. Foreclosures are down 68 percent since the height of the crisis and recoveries to the Fund have improved 68 percent from their lowest level–saving billions of dollars. While FHA must still respond to challenges presented by legacy books and market volatility, the independent actuary’s report demonstrates that FHA is firmly on the right track and is projected to continue improving. (1)
The MMIF is supposed to have a capital reserve ratio of 2 percent, so the FHA is still quite a bit away from receiving a clean bill of health. But according to projections, it should achieve that level in 2016 and then continue to improve from there. (35, Ex. II-3)
While this is all pretty abstract, there are some pretty concrete aspects to the health of the MMIF. The size of FHA premiums, paid by homeowners borrowing FHA-insured mortgages, is set in the context of the health of the MMIF because the FHA is a self-funded government agency. So low reserves means that it is harder to cut premiums. Higher FHA premiums mean that  mortgages are more expensive for the low- and moderate income borrowers who make up a large part of the FHA’s book of business. So the health of the MMIF is an indicator of sorts of the health of the housing market overall.

November 17, 2014 | Permalink | No Comments

November 14, 2014

No Action on Financial Innovation?

By David Reiss

The Consumer Financial Protection Bureau issued a Request for Comment on a proposed policy regarding No-Action Letters. Under the proposed policy, the Bureau could

issue no-action letters (NALs) to specific applicants in instances involving innovative financial products or services that promise substantial consumer benefit where there is substantial uncertainty whether or how specific provisions of statutes or regulations implemented by the Bureau would be applied (for example if, because of intervening technological developments, the application of statutes and regulations to a new project is novel and complicated). The Policy is also designed to enhance compliance with applicable federal consumer financial laws. (79 F.R. 62119)

The notice goes on,

The Bureau recognizes that, in certain circumstances, some may perceive that the current regulatory framework may hinder the development of innovative financial products that promise substantial consumer benefit because, for example, existing laws and rules did not contemplate such products. In such circumstances, it may be substantially uncertain whether or how specific provisions of certain statutes and regulations should be applied to such a product—and thus whether the federal agency tasked with administering those portions of a statute or regulation may bring an enforcement or supervisory action against the developer of the product for failure to comply with those laws. Such regulatory uncertainty may discourage innovators from entering a market, or make it difficult for them to develop suitable products or attract sufficient investment or other support.

Federal agencies can reduce such regulatory uncertainty in a variety of ways. For example, an agency may clarify the application of its statutes and regulations to the type of product in question—by rulemaking or by the issuance of less formal guidance. Alternatively, an agency may provide some form of notification that it does not intend to recommend initiation of an enforcement or supervisory action against an entity based on the application of specific identified provisions of statutes or regulations to its offering of a particular product. This proposal is concerned with the latter means of reducing regulatory uncertainty in limited circumstances. (79 F.R. 62119)

This notice certainly identifies a problem inherent in the complex regulatory state we live in — heavy regulation can impede innovation. It is a good thing to try to address that problem, but it is far from certain how effective a No Action regime will be in that regard. It is hard to imagine that it could do any harm though, so it is certainly a reasonable step to take.

Your thoughts? Comments are due December 15th, so get crackin’!

November 14, 2014 | Permalink | No Comments

November 13, 2014

Reiss on Privatization of Fannie and Freddie

By David Reiss

BadCredit.org profiled an article of mine in Brooklaw Professor Pushes for Privatization of Fannie Mae/Freddie Mac. The profile opens,

Since the end of the Great Recession, policymakers, academics and economists have been struggling with a very difficult question — what should we do with Fannie Mae and Freddie Mac? Should the government continue its role in providing mortgage credit to millions of American?

Fordham University Associate Professor of Law and Ethics Brent J. Horton made a proposal in his forthcoming paper “For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933“:

“The best way to reduce risk taking at Fannie Mae is to subject its MBS offerings to the disclosure requirements of the Securities Act of 1933,” Horton writes.

However, Brooklyn Law School Professor of Law David Reiss believes “the problems inherent in Fannie Mae’s structure are greater than those that increased disclosure can address.”

In his response, titled “Who Should Be Providing Mortgage Credit to American Households?” Reiss points to increased privatization as one way to address the question of what to do with Fannie Mae and Freddi Mac.

November 13, 2014 | Permalink | No Comments

November 12, 2014

Homeless in America

By David Reiss

The Department of Housing Urban Development released Part 1 of The 2014 Annual Homeless Assessment Report (AHAR) to Congress.  Part 1 provides Point-in-Time Estimates of Homelessness. Its key findings include,

  • In January 2014, 578,424 people were homeless on a given night. Most (69 percent) were staying in residential programs for homeless people, and the rest (31 percent) were found in unsheltered locations.
  • Nearly one-quarter of all homeless people were children under the age of 18 (23 percent or 135,701). Ten percent (or 58,601) were between the ages of 18 and 24, and 66 percent (or 384,122) were 25 years or older.
  • Homelessness declined by 2 percent (or 13,344 people) between 2013 and 2014 and by 11 percent (or 72,718) since 2007. (1)

The report notes that in “2010, the Administration released Opening Doors: Federal Strategic Plan to Prevent and End Homelessness, a comprehensive plan to prevent and end homelessness in America.” (3) The plan had four goals:

  1. Finish the job of ending chronic homelessness in 2015
  2. Prevent and end homelessness among Veterans by 2015
  3. Prevent and end homelessness for families, youth, and children by 2020
  4. Set a path to ending all types of homelessness (3)

HUD claims success on all four fronts:

  1. The number of individuals experiencing chronic homelessness declined by 21 percent, or 22,892 people, between 2010 and 2014.
  2. The number of homeless veterans declined by 33 percent (or 24,837 people) since 2010, and most of the decline was in the number of veterans staying in unsheltered locations.
  3. Since 2010 the number of homeless people in families has declined by 11 percent (or 25,690 people).
  4. Overall, homelessness has declined by more than 62,000 people since 2010 (62,042), a 10 percent reduction since the release of Opening Doors. (3)

In many ways, the success of American housing policy comes down to the question — can all Americans have a safe and affordable place to call home? The Administration answers this question in the affirmative. And this report appears to demonstrate that the Administration’s plan to end homelessness is working.

While I am skeptical of claims that we have finally figured out how to systematically address homelessness, I am happy to see that it is trending downward over the last few years.  This report was authored by some serious people, including Dr. Dennis Culhane of the National Center on Homelessness among Veterans at the University of Pennsylvania, so there is reason to trust these numbers. One can hope that this trend continues, but given the financial insecurity so many households face, I am worried that it will not.

November 12, 2014 | Permalink | No Comments

November 11, 2014

Veterans Day Then and Now

By David Reiss

Pericles, the greatest orator of Athens, had this to say more than 2,400 years ago when commemorating the sacrifices of his city’s soldiers during the Peloponnesian War:

Our form of government is called a democracy because its administration is in the hands, not of a few, but of the whole people. In the settling of private disputes, everyone is equal before the law. Election to public office is made on the basis of ability, not on the basis of membership to a particular class. No man is kept out of public office by the obscurity of his social standing because of his poverty, as long as he wishes to be of service to the state. And not only in our public life are we free and open, but a sense of freedom regulates our day-to-day life with each other. We do not flare up in anger at our neighbor if he does what he likes. And we do not show the kind of silent disapproval that causes pain in others, even though it is not a direct accusation. In our private affairs, then, we are tolerant and avoid giving offense. But in public affairs, we take great care not to break law because of the deep respect we have for them. We give obedience to the men who hold public office from year to year. And we pay special regard to those laws that are for the protection of the oppressed and to all the unwritten laws that we know bring disgrace upon the transgressor when they are broken.

That sounds like a city worth fighting for millennia ago and a society to aspire to today.

November 11, 2014 | Permalink | No Comments

November 10, 2014

Reiss on Refis Redux

By David Reiss

Refinancing must be in the air because I was interviewed twice in the last week about them. The first story appeared here. The second story, This Could Be Your Last Shot to Refinance a Mortgage, is in the Fiscal Times. It reads, in part,

After the Fed’s announcement Wednesday that it would end its historic $3 trillion bond-buying program, mortgage rates predictably began to rise.

The good news is that they were rising from the lowest rates of the year, after tumbling through most of October. At just over 4 percent, today’s mortgages rates still remain extremely low by historical standards. In 2008, before the housing busts, rates were around 6.5 percent.

*     *     *

Banks are stilled scarred from the housing bust and are dealing with significant changes to the regulatory environment, so lending standards are much tighter than they were in the past. Even former Fed chair Ben Bernanke recently admitted to having had his mortgage refinance application rejected.

To get the best rate, you’ll need excellent credit and lots of documentation of your income and assets. The average credit score for closed loans in September was 726, according to Ellie Mae.

Finally, shop around. “Talk to a big bank, talk to a little bank, talk to a mortgage broker,” says David Reiss, a professor of real estate finance at Brooklyn Law School. The gap between the best and the worst mortgage deals can be as much as a full percentage point.

November 10, 2014 | Permalink | No Comments

November 7, 2014

Reiss on Airbnb

By David Reiss

MainStreet.com quoted me in Housing Activists Claim Airbnb Cuts Into Affordable Apartment Inventory in Manhattan. The story opens

Popular and trendy neighborhoods in Manhattan accounted for 30% of units booked as private rentals on AirBnB.com, according to information subpoenaed by New York Attorney General (AG) Eric T. Schneiderman that Airbnb fought against releasing.

Those neighborhoods include the Lower East Side, Chinatown, Chelsea, Hells Kitchen, Greenwich Village and SoHo. “Removing rental units from the marketplace by operating them as illegal hotels damages the availability of housing,” said Roxanne Earley, a blogger with the Association for Neighborhood & Housing Development (ANHD).

Another tidbit from the AG’s report based on subpoenaed records is that commercial users of the home-sharing website collected $168 million in rent last year, controlled one in five AirBnb units and one in three bookings. “Although Airbnb is marketing itself as a company that helps the majority of its hosts make some extra money to keep their homes, the reality is that a multi-billion dollar business is helping a small portion of commercial users rake in a disproportionate amount of profit,” Earley told MainStreet.

“The markup on short-term rentals is much higher than that of long-term residential use of apartments and this has resulted in landlords breaking the law and using their units, sometimes whole buildings as illegal hotels,” said Earley.

And that’s eating into affordable housing units that city residents could be living in. “Commercial users earn an incredible markup on short term rentals and take units that may otherwise be affordable off of the market for long term occupancy,” Earley said.

The existence of rent regulation is unique to cities like New York and San Francisco and further complicates the Airbnb factor. Administered by a court or public authority, rent regulation limits the changes in price that can be attached to renting a home, which balances the negotiating power of landlord to tenant.

“If rent regulated apartments become profit-centers, tenants may also be incentivized to hang on to their apartments longer than they would otherwise, negatively impacting the availability of affordable housing for those who would use it purely for their own personal residence,” said David Reiss, professor at Brooklyn Law School.

 

November 7, 2014 | Permalink | No Comments