REFinBlog

Editor: David Reiss
Brooklyn Law School

June 3, 2016

Trump, Sanders and Housing Policy

By David Reiss

Donald_Trump_(14235998650)_(cropped)

Donald Trump

220px-Bernie_Sanders

Senator Sanders

 

 

 

 

 

 

 

I had earlier blogged about Hillary Clinton’s housing policy positions. Today, I turn to those of Donald Trump and Bernie Sanders.  Amazingly (or, perhaps, completely unsurprisingly), their housing policies present microcosms of their campaigns. Clinton came across as a well-prepared left of center policy wonk who was seeking to continue and perhaps expand a bit on Obama’s housing policy legacy.

In contrast, Trump has nothing of substance to say about housing policy on his campaign website.

Sanders, on the other hand, has a lot to say. He presents a very expensive laundry list of program expansions that would help low- and moderate-income address the cost of housing, but does not indicate how they would be funded. Here are some more details.

TRUMP

Trump has a very skeletal Positions page on his campaign website, listing just seven issues:

  1. Paying for the Wall
  2. Healthcare Reform
  3. U.S.-China Trade Reform
  4. Veterans Administration Reform
  5. Tax Reform
  6. Second Amendment Rights
  7. Immigration Reform

If you search the entire website, there are some passing mentions of housing, but even those are tangential to a housing policy platform (immigrants increase competition for housing, veterans get inadequate housing, the government spurred the housing bubble).

SANDERS

Sanders has a lengthy Affordable Housing platform, outlining ways to

  1. Expand Affordable Housing
  2. Promote Homeownership
  3. Help Underwater Homeowners
  4. Prevent Homelessness
  5. Get Lead out of Homes
  6. Address Housing and Environmental Justice

It struck me that nearly every one of the proposals involved an increase in funding, sometimes a dramatic one. His first proposal calls for a nearly thirty-fold increase in the funding for the National Housing Trust Fund from $174 million to $5 billion per year (the Obama Administration had asked Congress to provide $1 billion to capitalize the fund but Congress did not do so).

The Fund is currently being capitalized by contributions from Fannie Mae and Freddie Mac, as authorized by Housing and Economic Recovery Act of 2008. For Sanders’ plan to work, he would either (1) need to get these contributions to be dramatically expanded, which would likely raise interest rates on all residential mortgages or (2) get Congress to provide the increased funding. Good luck with that.

I was also struck by the fact that Sanders’ platform did not propose much meaningful reform of the housing sector.  How about getting the federal government to incentivize local governments to build more housing, and affordable housing in particular?

From my review of the three campaign websites (and for the purposes of this post, on that basis alone!), I favor Clinton’s housing policy platform. It is thoughtful, constructive and realistic.

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June 3, 2016 | Permalink | No Comments

June 2, 2016

Ensuring Sustainable Homeownership

By David Reiss

tornado-destruction-618718_1280

My short article, Ensuring That Homeownership Is Sustainable, was just published in the Westlaw Journal, Bank & Lender Liability. It opens,

The Federal Housing Administration has suffered as a result of many of the same unrealistic underwriting assumptions that led to problems for many lenders during the 2000s. It, too, was harmed by a housing market as bad as any since the Great Depression.

As a result, the federal government announced in 2013 that the FHA would require the first bailout in the agency’s history. While facing financial challenges, the FHA has also come under attack for the poor execution of policies designed to expand homeownership opportunities.

Leading commentators have called for the federal government to stop having the FHA do anything but provide liquidity to the low end of the mortgage market.

These critics rely on a few examples of agency programs that were clearly failures, but they do not address the FHA’s long history of undertaking comparable initiatives.

 In fact, the FHA has a history of successfully undertaking new homeownership programs. However, it also has operational flaws that should be addressed before it undertakes similar future homeownership initiatives.

INTRODUCTION TO THE FHA

Mortgage insurance is a product that is paid for by the homeowner but protects the lender if the homeowner defaults on the mortgage. The insurer pays the lender for losses it suffers from the homeowner’s default. Mortgage insurance is typically required for borrowers who have limited funds for down payments.

The FHA provides mortgage insurance for loans on single family and multifamily homes, and it is the world’s largest government mortgage insurer. Other significant providers are the Department of Veterans Affairs and private companies known as private mortgage insurers.

Mortgage insurance makes homeownership possible for many households that would otherwise not be able to meet lenders’ underwriting requirements.

Just like much of the federal housing infrastructure, the FHA has its roots in the Great Depression. The private mortgage insurance industry, like many others, was decimated in the early 1930s. Companies in the industry began to fail as almost half of all mortgages went into default. The government created the FHA to replace the PMI industry, which remained dormant for decades.

In the Great Depression, the housing markets faced problems that were similar to those faced by the same markets in the late 2000s. These problems included rapidly falling housing prices, widespread unemployment and underemployment, the rapid tightening of credit and — as a result of all of those trends — much higher default and foreclosure rates.

The FHA noted in its second annual report, issued in 1936, that the “shortcomings of the old system need no recital. It financed extensive overselling of houses at inflated values, to borrowers unable to pay for them.” Needless to say, the same could be said of our most recent housing bust.

Over its lifetime, the FHA has insured more than 40 million mortgages, helping to make homeownership available to a broad swath of American households. Indeed, the FHA mortgage has been essential to America’s transformation from a nation of renters to one of homeowners.

The early FHA created the modern American housing finance system, as well as the look and feel of post-war suburban communities through the construction standards the agency set for the new houses it insured.

The FHA has also had many other missions over the course of its existence — and a varied legacy to match.

Beginning in the 1950s, the FHA’s role changed from serving the entire mortgage market to focusing on certain segments. This changed mission had a major impact on everything the FHA did, including how it underwrote mortgage insurance and for whom it did so.

In recent years, the FHA has come under attack for poorly executing some of its attempts to expand homeownership opportunities, and leading commentators have called for the federal government to stop assigning such mandates to the agency. They argue that the FHA should focus only on providing liquidity for the portion of the mortgage market that serves low- and moderate-income households.

These critics rely on a couple of examples of failed programs, such as the Section 235 program enacted as part of the Housing and Urban Development Act of 1968 and the American Dream Downpayment Assistance Act of 2003.

Those programs required borrowers to make only tiny and sometimes even nominal down payments. The government enacted the Section 235 program in response to the riots that burned through American cities in the 1960s. It was intended to expand homeownership opportunities for low-income households, particularly black ones.

The American Dream program was also geared to increasing homeownership among lower-income and minority households. The crux of the critique of these programs is that they failed to ensure that borrowers had the capacity to repay their mortgages, leading to bad results for the FHA and borrowers alike.

Notwithstanding these failed initiatives, the FHA has a parallel history of successfully undertaking new homeownership programs. These successes include programs for veterans returning home from World War II, a mission that was later handed off to the VA.

At the same time, historically the FHA has clearly suffered from operational failures that should be addressed in the design of any future initiatives.

Unfortunately, the agency has not really grappled with its past failures as it moves beyond the financial crisis. To properly address operational failures, the FHA must first identify its goals. (6-7, footnote omitted)

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June 2, 2016 | Permalink | No Comments

June 1, 2016

Millennials Coming Home

By David Reiss

 

07-08_prod_look_homeward_angel

I was interviewed on Voice of America’s American Café in a story, Millennials Coming Home. The story touches on many of the themes that I blogged about last week. VoA sets up the show as follows:

A new study says that more American young people are moving back home after college than ever before. VOA’s American Cafe host David Byrd talks with three experts about this trend – how did it start, where is it going, and what does it mean?

You can listen to the edited podcast here and the complete interview with me here.

 

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June 1, 2016 | Permalink | No Comments

May 31, 2016

The Fed’s Effect on Mortgage Rates

By David Reiss

Federal Open Market Committee Meeting

Federal Open Market Committee Meeting

DepositAccounts.com quoted me in Types of Institutions in the U.S. Banking System – Investment Banks and Central Banks. It reads, in part,

Central Banks

Think of the central bank as the Grand Poobah of a country’s monetary system. In the U.S. that honor is bestowed upon the Federal Reserve. While there are other important central banks, like the European Central Bank, the Bank of England and the People’s Bank of China. For now, focus stateside.

Think of the central bank as the Grand Poobah of a country’s monetary system. In the U.S. that honor is bestowed upon the Federal Reserve.

The Federal Reserve was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. To keep it simple, think of the Fed as having responsibility in these four areas:

  1. conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices;
  2. supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers;
  3. maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
  4. providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.

You need look no further than the Federal Reserve FAQs to learn more about how it is structured.

The Federal Reserve may not take your money, but be clear it has much financial impact on your life. Brooklyn Law Professor David Reiss gives one example, “The Federal Reserve can have an impact on the interest rate you pay on your mortgage. Since the financial crisis, the Fed has fostered accommodative financial conditions which kept interest rates low. It has done this a number of ways, including through its monetary policy actions. The Federal Reserve’s Open Market Committee sets targets for the federal funds rate. The federal funds rate, in turn, influences interest rates for purchases, refinances and home equity loans.”

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May 31, 2016 | Permalink | No Comments

May 30, 2016

Song of Roland

By David Reiss

photo by Archimatth

A statue of Roland at Metz railway station, France

In commemoration of Memorial Day, a selection from The Song of Roland, an epic poem from the days of Charlemagne:

The Horn

CXLVIII

As Roland gazed on his slaughtered men, He bespake his gentle compeer agen: “Ah, dear companion, may God thee shield! Behold, our bravest lie dead on field! Well may we weep for France the fair, Of her noble barons despoiled and bare. Had he been with us, our king and friend! Speak, my brother, thy counsel lend, How unto Karl shall we tidings send?” Olivier answered, “I wist not how. Liefer death than be recreant now.”

CXLIX

“I will sound,” said Roland, “upon my horn, Karl, as he passeth the gorge, to warn. The Franks, I know, will return apace.” Said Olivier, “Nay, it were foul disgrace On your noble kindred to wreak such wrong; They would bear the stain their lifetime long. Erewhile I sought it, and sued in vain; But to sound thy horn thou wouldst not deign. Not now shall mine assent be won, Nor shall I say it is knightly done. Lo! both your arms are streaming red.” “In sooth,” said Roland, “good strokes I sped.”

CL

Said Roland, “Our battle goes hard, I fear; I will sound my horn that Karl may hear.” “‘Twere a deed unknightly,” said Olivier; “Thou didst disdain when I sought and prayed: Saved had we been with our Karl to aid; Unto him and his host no blame shall be: By this my beard, might I hope to see My gentle sister Alda’s face, Thou shouldst never hold her in thine embrace.”

CLI

“Ah, why on me doth thine anger fall?” “Roland, ’tis thou who hast wrought it all. Valor and madness are scarce allied, Better discretion than daring pride. All of thy folly our Franks lie slain, Nor shall render service to Karl again, As I implored thee, if thou hadst done, The king had come and the field were won; Marsil captive, or slain, I trow. Thy daring, Roland, hath wrought our woe. No service more unto Karl we pay, That first of men till the judgment day; Thou shalt die, and France dishonored be Ended our loyal company A woful parting this eve shall see.”

CLII

Archbishop Turpin their strife hath heard, His steed with the spurs of gold he spurred, And thus rebuked them, riding near: “Sir Roland, and thou, Sir Olivier, Contend not, in God’s great name, I crave. Not now availeth the horn to save; And yet behoves you to wind its call, Karl will come to avenge our fall, Nor hence the foemen in joyance wend. The Franks will all from their steeds descend; When they find us slain and martyred here, They will raise our bodies on mule and bier, And, while in pity aloud they weep, Lay us in hollowed earth to sleep; Nor wolf nor boar on our limbs shall feed.” Said Roland, “Yea, ’tis a goodly rede.”

CLIII

Then to his lips the horn he drew, And full and lustily he blew. The mountain peaks soared high around; Thirty leagues was borne the sound. Karl hath heard it, and all his band. “Our men have battle,” he said, “on hand.” Ganelon rose in front and cried, “If another spake, I would say he lied.”

CLIV

With deadly travail, in stress and pain, Count Roland sounded the mighty strain. Forth from his mouth the bright blood sprang, And his temples burst for the very pang. On and onward was borne the blast, Till Karl hath heard as the gorge he passed, And Naimes and all his men of war. “It is Roland’s horn,” said the Emperor, “And, save in battle, he had not blown.” “Battle,” said Ganelon, “is there none. Old are you grown – all white and hoar; Such words bespeak you a child once more. Have you, then, forgotten Roland’s pride, Which I marvel God should so long abide, How he captured Noples without your hest? Forth from the city the heathen pressed, To your vassal Roland they battle gave, He slew them all with the trenchant glaive, Then turned the waters upon the plain, That trace of blood might none remain. He would sound all day for a single hare: ‘Tis a jest with him and his fellows there; For who would battle against him dare? Ride onward – wherefore this chill delay? Your mighty land is yet far away.”

CLV

On Roland’s mouth is the bloody stain, Burst asunder his temple’s vein; His horn he soundeth in anguish drear; King Karl and the Franks around him hear. Said Karl, “That horn is long of breath.” Said Naimes, “‘Tis Roland who travaileth. There is battle yonder by mine avow. He who betrayed him deceives you now. Arm, sire; ring forth your rallying cry, And stand your noble household by; For your hear your Roland in jeopardy.”

CLVI

The king commands to sound the alarm. To the trumpet the Franks alight and arm; With casque and corselet and gilded brand, Buckler and stalwart lance in hand, Pennons of crimson and white and blue, The barons leap on their steeds anew, And onward spur the passes through; Nor is there one but to other saith, “Could we reach but Roland before his death, Blows would we strike for him grim and great.” Ah! what availeth! – ’tis all too late.

CLVII

The evening passed into brightening dawn. Against the sun their harness shone; From helm and hauberk glanced the rays, And their painted bucklers seemed all ablaze. The Emperor rode in wrath apart. The Franks were moody and sad of heart; Was none but dropped the bitter tear, For they thought of Roland with deadly fear. Then bade the Emperor take and bind Count Gan, and had him in scorn consigned To Besgun, chief of his kitchen train. “Hold me this felon,” he said, “in chain.” Then full a hundred round him pressed, Of the kitchen varlets the worst and best; His beard upon lip and chin they tore, Cuffs of the fist each dealt him four,

Roundly they beat him with rods and staves; Then around his neck those kitchen knaves Flung a fetterlock fast and strong, As ye lead a bear in a chain along; On a beast of burthen the count they cast, Till they yield him back to Karl at last.

CLVIII

Dark, vast, and high the summits soar, The waters down through the valleys pour, The trumpets sound in front and rear, And to Roland’s horn make answer clear. The Emperor rideth in wrathful mood, The Franks in grievous solicitude; Nor one among them can stint to weep, Beseeching God that He Roland keep, Till they stand beside him upon the field, To the death together their arms to wield. Ah, timeless succor, and all in vain! Too long they tarried, too late they strain.

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May 30, 2016 | Permalink | No Comments

May 27, 2016

Mommy, I’m Home!

By David Reiss

cartoon by Mell Lazarus

The Pew Research Center has released For First Time in Modern Era, Living with Parents Edges out Other Living Arrangements for 18- to 34-Year-Olds (link for complete report on right side of page). This report adds to the growing literature on changes in household formation (see here, for instance) that have taken hold in large part since the financial crisis. There are lots of reasons to think that the way we live now is different from how we lived one generation, two generations, three generations ago.

The report opens,

Broad demographic shifts in marital status, educational attainment and employment have transformed the way young adults in the U.S. are living, and a new Pew Research Center analysis of census data highlights the implications of these changes for the most basic element of their lives – where they call home. In 2014, for the first time in more than 130 years, adults ages 18 to 34 were slightly more likely to be living in their parents’ home than they were to be living with a spouse or partner in their own household.

This turn of events is fueled primarily by the dramatic drop in the share of young Americans who are choosing to settle down romantically before age 35. Dating back to 1880, the most common living arrangement among young adults has been living with a romantic partner, whether a spouse or a significant other. This type of arrangement peaked around 1960, when 62% of the nation’s 18- to 34-year-olds were living with a spouse or partner in their own household, and only one-in-five were living with their parents. (4, footnotes omitted)

The report found that education, race and ethnicity was linked to young adult living arrangements. Less educated young adults were more likely to live with a parent as were black and Hispanic young adults. Some of the other key findings include,

  • The growing tendency of young adults to live with parents predates the Great Recession. In 1960, 20% of 18- to 34-year-olds lived with mom and/or dad. In 2007, before the recession, 28% lived in their parental home.
  • In 2014, 40% of 18- to 34-year-olds who had not completed high school lived with parent(s), the highest rate observed since the 1940 Census when information on educational attainment was first collected.
  • Young adults in states in the South Atlantic, West South Central and Pacific United States have recently experienced the highest rates on record of living with parent(s).
  • With few exceptions, since 1880 young men across all races and ethnicities have been more likely than young women to live in the home of their parent(s).
  • The changing demographic characteristics of young adults—age, racial and ethnic diversity, rising college enrollment—explain little of the increase in living with parent(s) (8-9)

It seems like unemployment and underemployment; student debt; and postponement or retreat from the institution of marriage all play a role in delaying young adult household formation.

My own idiosyncratic takeaway from the report is that, boy, the way we live now sure is different from how earlier generations lived (look at the graph on page 4 to see what I mean). Moreover, there is no reason to think that one way is more “natural” or better than the other. That being said, it sure is worth figuring out what we are doing now in order to craft policies to properly respond to it.

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May 27, 2016 | Permalink | No Comments