September 10, 2014
Husock and Armlovich of the Manhattan Institute for Policy Research have posted an Issue Brief, New York’s Rent Burdened Households: Recalculating the Total, Finding a Better Solution. The brief makes some important points, but they are almost lost because of its histrionic tone.
First, the good points. The authors write this brief in reaction to the de Blasio administration’s plan to build or preserve 200,000 units of affordable housing. They believe, however, that the administration has exaggerated the need. They write: “the housing needs of low-income New Yorkers must be acknowledged and addressed. Still, they should not be exaggerated by numbers that fail to reflect the income and in-kind assistance that benefit poor households.” (6)
They argue that the administration’s claim that more than 600,000 households are “severely rent-burdened” is flawed, resulting in an overestimate of the need for affordable housing. While I am not in a position to evaluate the underlying work, they make a reasonable case that the administration did not properly account for the impact of Section 8 housing subsidies and a variety of other programs that offer financial assistance to low-income households in arriving at their number.
They also argue that the administration’s proposed solution, permanent affordability, is flawed because some households that may be income-eligible at the commencement of their tenure in an affordable unit may end up with a significantly higher income down the line. Indeed, this has been a long-time issue with the Mitchell-Lama program.
These are some serious issues for the de Blasio administration to chew over. Clearly, we should be working from the best data we can about the extent to which households are severely burdened by housing costs. (Indeed, another recent study also indicates that the administration is working from too high of an number.) And just as clearly, the solution chosen by the administration should work as effectively as possible to reduce the rent burden for low- and moderate-income households.
But the brief’s tone, unfortunately, masks these insights. First, the brief opens by questioning the basis for the mayor’s affordable housing plan — that many New Yorker’s are severely rent burdened. But the authors acknowledge that at least 300,000 households are severely burdened, even after they make their adjustments to the administration’s numbers. That hardly undercuts the policy rationale for the Mayor’s affordable housing initiative.
Moreover, some of the adjustments made by the authors are themselves suspect. For instance, the authors exclude households “that report severe rent burdens while paying more than the 90th percentile citywide of per-capita” out-of-pocket rent. (5) They state that “Logic dictates that such households have significant existing savings or assets themselves, or they receive assistance from family or other sources.” (5) That seems like an extraordinary “logical” leap to me. While it may describe some households at the 90th percentile, I would think that it is also logical that it includes some people who barely have enough money to buy food.
As to the solution of permanent affordability, the authors write,
a household member could win the lottery, or sign a multimillion-dollar major league baseball contract, and an affordable unit’s rent would remain unchanged. Affordable units would be “permanently” affordable, creating what economists term a “lock-in effect,” limiting the likelihood that such units will be vacated. This is problematic for a city housing policy that seeks to decrease the overall number of severely rent-burdened households. (6)
This is just silly. Very few people have such windfalls. And very few of those who do have such windfalls live in small apartments afterwards. The more common problem is that young, educated people get affordable units when their earnings are low and then become middle-class or upper-middle class over the years. This is a serious program design issue and it means that the administration should think through what permanent affordability should mean over the lifetime of a typical household.
As I noted, this brief raises some serious issues amongst all of its heated rhetoric. One hopes that the administration can get through the hot air to the parts that are informed by cool reason.
September 5, 2014
I will be moderating a panel at the 2014 Brooklyn Book Festival on Sunday, September 21st at 10am in the Brooklyn Law School Moot Courtroom. The panel is
Planning and Protesting: Cities Evolve!
With the city constantly evolving, each major project has its supporters and protesters. Authors Gregory Smithsimon and Benjamin Shepard (The Beach Beneath The Streets – Contesting New York City’s Public Spaces) and Daniel Campo (The Accidental Playground: Brooklyn Waterfront Narratives of the Undesigned and Unplanned) and Peter Linebaugh (Stop, Thief! The Commons, Enclosures, and Resistance) discuss how public space is shaped through policy, perspective and protests, how to agree to disagree, and the dynamics of shaping a city’s growth and change. Moderator David Reiss, Professor, Brooklyn Law School.
September 4, 2014
The former Acting Director of the Federal Housing Finance Agency, Edward Demarco, has issued a short policy brief from his new perch at the Milken Institute’s Center for Financial Markets.While there is nothing that is really new in this policy brief, Twelve Things You Need to Know About the Housing Market, it does set forth a lot of commonsensical views about the housing markets. I do take issue, however, with his optimism about the structural improvements in the housing finance sector. He writes,
The crisis showed that numerous structural improvements were needed in housing—and such improvements have been under way for several years. Poor data, misuse of specialty mortgage products, lagging technologies, weak servicing standards, and an inadequate securitization infrastructure became evident during the financial crisis. A multi-year effort to fix and rebuild this infrastructure has been quietly under way, with notable improvements already in place.The mortgage industry has been working since 2010 to overhaul mortgage data standards and the supporting technology. New data standards have emerged and are in use, with more on the way. These standards should improve risk management while lowering origination costs and barriers to entry.
* * *
Structural improvements will take several more years. A new securitization infrastructure has been in development for more than two years. This ongoing work should be a cornerstone for the future secondary mortgage market. Other structural improvements will include updated quality assurance (rep and warrant) systems for the Federal Housing Administration, Fannie and Freddie, revamped private mortgage insurance eligibility standards, and completion and implementation of remaining Dodd-Frank rulemakings. (2)
DeMarco himself had led the charge to develop a common securitization platform while at the FHFA, so I take care in critiquing his views about structural change. Nonetheless, I am worried that he is striking too optimistic of a note about the state of Fannie and Freddie. They have been in a state of limbo for far too long (which DeMarco acknowledges). All sorts of operational risks may be cropping up in the entities as employees sit around (or walk out the door) waiting for Congress to act. I think commentators should be striking a far more ominous tone about our housing finance system — something this big should not be treated as an afterthought by our elected officials.
September 2, 2014
Mark Zandi and Cristian deRitis of Moody’s, along with Jim Parrott of the Urban Institute, have posted Putting Mortgage Insurers on Solid Ground. They wrote this in response to the Private Mortgage Insurance Eligibility Requirements set forth by the FHFA. While generally approving of the requirements, they argue that
Several features of the rules as currently written, however, would likely
unnecessarily increase costs and cyclicality in the mortgage and housing markets.
With a few modest changes, these flaws can be remedied without sacrificing the
considerable benefits of the new standards. (1)
I would first start by reviewing their disclosure: “Mark Zandi is a director of one mortgage insurance company, and Jim Parrott is an advisor to another. The authors do not believe that their analysis has been impacted by these relationships, however. Their work reflects the authors’ independent beliefs regarding the appropriate financial requirements for the industry.” While, I understand that the authors believe that their views are not impacted by their financial relationships with private mortgage insurers, readers will certainly want to take them into account when evaluating those views.
The authors argue that FHFA’s requirements are procyclical, that is they become more burdensome just as mortgage insurers are facing a distressed environment. This could contribute to a vicious cycle where mortgage credit tightens because of regulatory causes just when we might want credit to loosen up. This is certainly something we should look out for.
They also argue that the FHFA’s requirements will increase mortgage insurance premiums unnecessarily because they increase capital reserves too much. I find this argument less compelling. The Private Mortgage Insurance industry has typically done terribly in distressed environments from the Great Depression through the 2000s. Not only have there been failures but they have also reduced their underwriting of new insurance just when the market was most fragile.
But there are certain shaky assumptions built into this analysis. For instance, they argue that Private Mortgage Insurance companies will need to maintain their historical after-tax return on capital of 15%. But if the business model is shored up with higher capital reserves, investors should be satisfied with a lower return on capital because the companies are less likely to go bust. That is, instead of increasing premiums for homeowners, it is possible that higher capital requirements might just reduce profits.
The authors write that while “the increase in capital requirements is clearly warranted, there are certain features of the requirements as currently drafted that will increase mortgage insurance premiums unnecessarily, running counter to the aim of policymakers, including the FHFA, to encourage greater use of private capital in housing finance.” (2-4) Policymakers have lots of goals for private mortgage insurance, including having it not implode during down markets. An unthinking reliance on private capital is not what we should be after. Rather, we should seek to promote a thoughtful reliance on private capital, taking into account how we it can best help us maintain a healthy mortgage market throughout the business cycle.