June 4, 2015
Jim Parrott and Mark Zandi have released a report, Privatizing Fannie and Freddie: Be Careful What You Ask For. The authors go through a very useful exercise in which they break down the cost of reprivatizing. The report opens,
Few are happy with the current housing finance system that has Fannie Mae and Freddie Mac in conservatorship and taxpayers backing most of the nation’s residential mortgage loans. Yet legislative efforts to replace the system have largely faltered, raising concern that we may not have the political will or competence to replace it any time soon.
This has created an opening for those who contend that we should not replace the system at all, but simply recapitalize the government-sponsored enterprises and release them from conservatorship. Fannie and Freddie were remarkably profitable prior to the financial crisis, after all, and have been consistently in the black recently. Why embark on the laborious, risky and now stalled process of fundamental reform when we can simply return to a model that we know can provide steady access to affordable, long-term fixed-rate lending?
While we both have serious concerns with the wisdom of releasing the duopoly back into the market, we thought it useful to set those concerns aside for the moment to explore the economics of the move. The discussion often takes for granted that this path would take us back to the world precrisis, but economic conditions and the regulatory environment have changed in ways that would significantly affect how Fannie and Freddie would function as reprivatized institutions. (2)
Parrott and Zandi conclude that
The debate over whether to recapitalize and release the GSEs into the private market is often framed as a choice of whether or not to return to a prior period in lending. For all its shortcomings, the argument goes, at least we know what to expect in the cost and availability of mortgage credit. But this is a misconception. In releasing the GSEs into the private market again, we would release them into a very different regulatory and economic environment, and they would respond, not surprisingly, by charging very different mortgage rates. (4)
I really have no argument with Parrott and Zandi’s paper, but I would note that their conclusions don’t differ so much from the pre-crisis academic papers that attempted to quantify the increase in mortgage rates that would result from privatizing the two companies — fifty basis points, give or take (see, for example, The GSE Implicit Subsidy and Value of Government Ambiguity).
I value Parrott and Zandi’s paper because it reminds us to keep pushing forward with real housing finance reform even though Congress has not yet made any progress on that front.
- National Association of Realtors reports April Pending home sales, up 1.3% – the strongest in 9 years.
- A joint study by the NYU Furman Center and Capital One Renting in America’s Largest Cities: National Affordable Rental Housing Landscape reveals a trend in all 11 of the largest metro areas in the U.S., which the study focused on, of rent increases outpacing inflation, tending to not keep up with the increase in number of renters and an increase in severely rent burdened low income renters.
- Zillow’s recent research concludes that the rent affordability crisis leads to lower homeownership rates because renters cannot afford to save for a downpayment in high rent metros like Los Angeles.
June 3, 2015
Bloomberg BNA quoted me in Nagging Economic and Credit Questions Dampen Bankruptcy Victory for Bankers (behind paywall). It reads, in part:
The U.S. Supreme Court delivered an important bankruptcy ruling for bankers that doesn’t, however, do anything about still-struggling homeowners (Bank of Am. N.A. v. Caulkett, 2015 BL 171240, U.S., No. 13-cv-01421, 6/1/15); (Bank of Am. N.A. v. Toledo-Cardona, 2015 BL 171240, U.S., No. 14-cv-00163, 6/1/15).
In a June 1 decision, the court said Chapter 7 debtors cannot void junior liens on their homes when first-lien debt exceeds the value of the property, as long as the senior debt is secured and allowed under the Bankruptcy Code.
The decision is a victory for Bank of America, which held both junior liens in the two related cases, and for banking groups that said a different result could have destabilized more than $40 billion in commercial loans secured by similar liens.
But Brooklyn Law School Professor David Reiss June 2 said the case highlights the need for a broad remedy for homeowners who have continued to struggle to make payments since the financial crisis.
“The bank’s position as a legal matter is a very reasonable one, but from a policy perspective we needed and still need a bigger and more systemic solution to the problems that households face,” Reiss told Bloomberg BNA.
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[S]ome said the ruling highlights economic questions on several levels.
Reiss, who coedits a financial blog, June 2 said the case shows the federal government’s inability to deal head-on with the impact of financial turmoil in 2008 and 2009.
“Not enough is being done to move households beyond the crisis, and it’s bad for households and it’s bad for the financial sector,” Reiss said. “Here we are seven or eight years later and we’re sitting here with these valueless second mortgages. We’re just slogging through the muck and we’re not coming up with any good solutions to get past it.”
- The Boom, the Bust and the Future of Homeownership, by Stuart A. Gabriel & Stuart S. Rosenthal, Real Estate Economics, Vol. 43, Issue 2, pp. 334-374, 2015.
- Promoting ‘Inclusive Communities’: A Modified Approach to Disparate Impact Under the Fair Housing Act, by Cornelius Joseph Murray IV, Louisiana Law Review, Vol. 75, No. 213, 2014.
- How Low Can House Prices Go? Estimating a Conservative Lower Bound, by Alexander N. Bogin, Stephen Bruestle, & William M. Doerner, May 14, 2015.
- Strategic Mortgage Default: The Effect of Neighborhood Factors, by Michael G. Bradley, Amy Crews Cutts, & Wei Liu, Real Estate Economics, Vol. 43, Issue 2, pp. 271-299, 2015.
- An Agency Problem in the MBS Market and the Solicited Refinancing Channel of Large-Scale Asset Purchases, by John Kandrac & Bernd Schlusche, FEDS Working Paper No. 2015-027.
Univision quoted me in Estrategias para Ahorrar Dinero Cada Mes (Strategies to Save Money Each Month). It reads, in part (in English),
Save water and energy. You can monitor your heat/air conditioning services in simple ways, for example, by acquiring a programmable thermostat, which will allow you to maintain your home at a comfortable temperature while you are home and turn in it “energy efficient” when you go out, suggests David Reiss, Research Director, Center for Urban Business Entrepreneurship (NY).
Has your water bill gone up in the last few years? Check your toilet and make sure it’s not running or that your sink is not leaking.
Repairing your bathroom fixtures and keeping them in good working order will help you save money, added the expert.
June 1, 2015
Law360 quoted me in Lawsky’s Aggressive Tactics Provided Model For Regulators (behind a paywall). It reads, in part,
New York Superintendent of Financial Services Benjamin Lawsky’s frequent, aggressive and often creative enforcement actions generated billions of dollars for the state and put his agency at the forefront in financial services regulation, and observers expect a similar approach from Lawsky’s successor when he leaves his post next month.
Confirmed to lead the New York Department of Financial Services in May 2011, few expected the new agency, which combined the state’s banking and insurance regulators, to make much of a mark. But after collecting $3.3 billion in penalties and forcing several traders and top executives out of their positions, Lawsky’s agency has proven to be a powerful enforcer.
“His biggest legacy is simply that he stood up a brand new regulator in one of the global financial centers and made it matter almost immediately,” said Matthew L. Schwartz, a partner at Boies Schiller & Flexner LLP and a former federal prosecutor. Lawsky, who announced his departure from the agency on May 20, established a name for himself and for the Department of Financial Services when he jumped ahead of federal banking regulators and prosecutors in announcing a $340 million settlement with British bank Standard Chartered PLC over its alleged violation of U.S. sanctions against Iran and other countries in August 2012.
That a newly formed state regulatory agency would move ahead with a stiff penalty and threaten to wield the most powerful of weapons — the pulling of Standard Chartered’s license to operate in New York state — reportedly rankled his federal counterparts
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“He made clear that consumer protection is integral to the mission of the agency,” Brooklyn Law School professor David Reiss said.
Despite Lawsky’s frequent reminders that he works for New York Gov. Andrew Cuomo — for whom he has also served as chief of staff — and the superintendent’s constant praise for his staff, there is fear among some reformers that the DFS won’t be the same without Lawsky at the helm.
“Lawsky proves that the character of individual regulators can make a crucial difference more than the letter of the law itself,” said Bartlett Naylor of Public Citizen.
“Ideally, he’ll inspire his successor and other regulators that honor awaits the vigilant and opprobrium will fall upon the indolent. More practically, however, the problems of regulatory capture by an enormously influential industry reliant on government favor can prove overwhelming,” Naylor added.
Others are more confident that the agency Lawsky set up will continue its work even after his move to the private sector.
In part, that’s because the penalties the DFS has wracked up have been a boon to New York’s budget.
Cuomo, the state’s former attorney general, has an interest in many of the issues Lawsky acted on, as well.
“I have every reason to expect that Cuomo would want to have a very vigorous enforcer to replace Lawsky,” Reiss said.