October 29, 2015
S&P posted a report, Historical Data Show That Agency Mortgage Loans Are Likely to Perform Significantly Better Than Comparable Non-Agency Loans. The overview notes,
- We examined the default frequencies of both agency and non-agency mortgage loans originated from 1999-2008.
- As expected, default rates for both agencies and non-agencies were higher for crisis-era vintages relative to pre-crisis vintages.
- The loan characteristics that were the most significant predictors of default were FICO scores, debt-to-income (DTI) ratios, and loan-to-value (LTV) ratios.
- Agency loans performed substantially better than nonagency loans for all vintages examined. The default rate of agency loans was approximately 30%-65% that for comparable non-agency loans, whether analyzed via stratification or through a logistic regression framework. (1)
This is not so surprising, but it is interesting to see the relative performance of Frannie (Fannie & Freddie) and Private-Label loans quantified and it is worth thinking through the implications of this disparity.
S&P was able to do this analysis because Fannie and Freddie released their “loan-level, historical performance data” to the public in order to both increase transparency and to encourage private capital to return to the secondary mortgage market. (1) Given that the two companies have transferred significant credit risk to third parties in the last few years, this is a useful exercise for potential investors, regulators and policymakers.
It is unclear to me that this historical data gives us much insight into future performance of either Frannie or Private-Label securities because so much has changed since the 2000s. Dodd-Frank enacted the Qualified Mortgage, Ability-to-Repay and Qualified Mortgage regimes for the primary and secondary mortgage market and they have fundamentally changed the nature of Private-Label securities. And the fact that Fannie and Freddie are now in conservatorship has changed how they do business in very significant ways just as much. So, yes, old Frannie mortgages are likely to perform better, but what about new ones?
October 28, 2015
Yesterday, I blogged about the affordable housing crisis in New York City. Today, I look at a report from the Center on Budget and Policy Priorities, How Housing Vouchers Can Help Address California’s Rental Crisis. It opens,
California’s severe shortage of affordable housing has hit low-income renters particularly hard. Nearly 1.6 million low-income California renter households paid more than half of their income for housing in 2013, and this number has risen 28 percent since 2007. While the shortage is most severe on California’s coast, many families throughout California struggle to pay the rent. A multifaceted approach with roles for local, state, and federal governments is needed to address the severe affordable housing shortage, but the federal Housing Choice Voucher program can play an outsized role.
California’s high housing costs stretch struggling families’ budgets, deepening poverty and hardship and exacerbating a host of other problems. For example, 23 percent of Californians are poor, according to Census measures that take housing costs into account, well above the poverty rate of 16 percent under the official poverty measure. California has 14 percent of the nation’s renter households but nearly 30 percent of the overcrowded renters. And California has one-fifth of the nation’s homeless people, more than any other state. A large body of research shows that poverty, overcrowding, housing instability, and homelessness can impair children’s health and development and undermine their chances of success in school and later in the workforce.
Housing vouchers help some 300,000 low-income California families afford the rent, more than all other state and federal rental assistance programs combined. Vouchers reduce poverty, homelessness, and housing instability. They can also help low-income families — particularly African American and Hispanic families — raise their children in safer, lower-poverty communities and avoid neighborhoods of concentrated poverty. Moreover, so-called “project-based” vouchers can help finance the construction of affordable rental housing in areas with severe shortages.
Yet the number of vouchers in use has fallen in recent years, even as California’s housing affordability problems have worsened. Due to across-the-board federal budget cuts enacted in 2013 (called sequestration), 14,620 fewer California families used vouchers in December 2014 than in December 2012. By restoring funding for these vouchers, Congress can enable thousands more California families to afford safe, stable housing. (1, reference omitted)
Really, the analysis here is not California-specific. The authors are arguing that low-income families benefit greatly from rental subsidies and that Congress should restore funding for housing vouchers because they provide targeted, effective assistance to their users. While California has a high concentration of voucher users, all low-income renter households would benefit from an increase in the number of housing vouchers. No argument there.
I am disappointed that the report does not address an issue that I highlighted yesterday — attractive places like NYC and California continue to draw a range of people from global elites to low-income strivers. Policymakers cannot think of the affordable housing problems in such places as one that can be “fixed.” Rather, it must be seen as, to a large extent, a symptom of success.
So long as more and more people want to live in such places, housing costs will pose a challenge. Housing costs can be mitigated to some extent in hot destinations, but they are hard to solve. And if they are to be solved, those destinations must be willing to increase density to build enough units to house all the people who want to live there.
- Foiled by the Banks? How a Lender’s Decision May Support or Undermine a Jurisdiction’s Environmental Policies that Promote Green Buildings, Darren A. Prum, Michigan Journal of Environmental & Administrative Law, 2015, Forthcoming.
- The Numerus Clausus Principle, Property Customs, and the Emergence of New Property Forms, Yun-chien Chang & Henry E. Smith, Iowa Law Review, Vol. 100, 2015.
- Building Self-Sufficiency for Housing Voucher Recipients: Interim Findings from the Work Rewards Demonstration in New York City, Stephen Nunez, Nandita Verma & Edith Yang, New York: MDRC, June 2015.
- Size Signals Success: Evidence from Real Estate Private Equity, Sebastian Krautz & Franz Fuerst, Journal of Portfolio Management, Vol. 41, No. 5, 2015.
- Debt, Poverty, and Personal ‘Financial Distress’, Stephen J. Ware, 89 American Bankruptcy Law Journal 493 (2015).
- Household Debt and Crises of Confidence, Thomas Hintermaier & Winfried Koeniger, CEPR Discussion Paper No. DP10865.
- Trend-Spotting in the Housing Market, Nikos Askitas, IZA Discussion Paper No. 9427.
- Large-Scale Buy-to-Rent Investors in the Single-Family Housing Market: The Emergence of a New Asset Class?, James Mills, Raven Molloy & Rebecca Zarutskie, FEDS Working Paper No. FEDGFE2015-84.
- How House Price Dynamics and Credit Constraints Affect the Equity Extraction of Senior Homeowners, Stephanie Moulton, Samuel Dodini, Donald R. Haurin & Maximilian D. Schmeiser, FEDS Working Paper No. FEDGFE2015-70.
- Real Estate Fund Openings and Cannibalization, David H. Downs, Steffen P. Sebastian & Rene-Ojas Woltering.
- The Department of Housing and Urban Development has proposed a new rule, Quid Pro Quo and Hostile Environment Harassment and Liability for Discriminatory Housing Practices Under the Fair Housing Act. HUD seeks to clarify the standards for use in investigating and adjudicating accusations of harassment on the basis of race, color, religion, national origin, sex, familial status or disability under the Fair Housing Act. The proposed standards would specify how HUD would evaluate complaints of quid pro quo (“this for that”) harassment and hostile environment harassment and provide for uniform treatment of Fair Housing Act claims raising such allegations in the federal courts. According to the rule “quid pro quo” and “hostile environment harassment,” as prohibited under the Fair Housing Act, it also adds illustrations of discriminatory housing practices that constitute such harassment.
- The U.S. Treasury’s Community Development Financial Institutions (CDFI) Fund has announced the availability of $5 billion for the 2015 allocation round for New Market Tax Credits (NMTC) Program (applications are available until 12/16/2015). The NMTC program is used to offer 7 year tax credits to attract private investment in the development of low income housing and is widely considered to be a very effective tool for the development of affordable housing.
October 26, 2015
S&P has posted a report, What’s Pushing Down The U.S. Homeownership Rate? It opens,
Seven years after the Great Recession began, a number of key economic factors today have reverted from their short-term extremes. Home prices are rebounding, unemployment is declining, and optimism is rising among economists if not among financial markets that the U.S. economy may finally be strong enough to withstand a rate hike from the Federal Reserve. All these trends point to reversals from the recession’s dismal conditions. Even so, one telling trend for the nation’s economy hasn’t yet reverted to its historic norm: the homeownership rate. The rising proportion of renters to owner occupants that followed the housing market turmoil has yet to wane. Compound this with tougher mortgage qualifying requirements over recent years, and it’s not surprising that the homeownership rate, which measures the percentage of housing units that the owner occupies, dropped to a 50 year low of 63.4% in first quarter 2015. However, the further decreases in unemployment and increases in hourly wages that our economists forecast for the next two years may set the stage for an eventual comeback, if only a modest one. (1)
S&P concludes that many have chosen not to become homeowners because of diminished “mortgage availability and income growth.” (8) Like many others, S&P assumes inthat the homeownership rate is unnaturally depressed, having fallen so far below its pre-bubble high of 69.2%. While the current rate is low, S&P does not provide any theory of a “natural” rate of homeownership (cf. natural rate of unemployment). Clearly, the natural rate in today’s economy s higher than something in the 40-50 percent range that existed before the federal government became so involved in housing finance. And clearly, it is lower than 100% — not everyone should be or wants to be a homeowner. But merely asserting that it is lower than its high is an insufficient basis for identifying the appropriate level today.
I think that the focus should remain on income growth and income inequality. If we address those issues, the homeownership rate should find its own equilibrium. If we push people into homeownership without ensuring that they have stable incomes, we are setting them up for a fall.