Author Archives: David Reiss

Housing Affordability for Moderate-Income Households

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The Center for Housing Policy’s most recent issue of Housing Landscape gives its Annual Look at The Housing Affordability Challenges of America’s Working Households. The Center finds that

Overall, 15.2 percent of all U.S. households (17.6 million households) were severely housing cost burdened in 2013. Renters face the biggest affordability challenges. In 2013, 24.3 percent of all renter households were severely burdened compared to 10.0 percent of all owner households. (1, footnote omitted)

The Center summarizes “the severe housing cost burdens of low- and moderate-income working households.” (1) Unsurprisingly. these households face

significantly greater affordability challenges than the overall population. In 2013,21.2 percent of working households were severely cost burdened (9.6 million households).Twenty-five percent of working renters and 17.1 percent of working homeowners paid more than half of their incomes for housing that year. (1)

The report notes some modest good news:

Since 2010,the overall share of working households with a severe housing cost burden has  fallen.This modest decline is the result of a complex combination of factors, including the shift of  some higher-income households from homeownership into rental housing. An insufficient supply of rental housing and sustained increases in rents have led to millions of working households having to pay too much for housing or live far from their jobs, in substandard housing,or in poor-quality neighborhoods. (1)

Federal and local housing policy has not yet come to grips with the fact low- and moderate-income households have been paying a significant portion of their income in housing costs year after year. Household have to make difficult trade-offs among cost, distance from employment, housing quality and neighborhood quality.

The Center notes that more can be done to support affordable housing at the federal and state levels, but it is not clear to me that there are any politically feasible policy responses that can make a serious dent in the affordability of housing for working households.

Mortgaging the Future

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The Federal Reserve Bank of San Francisco’s most recent Economic Letter is titled Mortgaging the Future? In it, Òscar Jordà, Moritz Schularick, and Alan M. Taylor evaluate the “Great Mortgaging” of the American economy:

In the six decades following World War II, bank lending measured as a ratio to GDP has quadrupled in advanced economies. To a great extent, this unprecedented expansion of credit was driven by a dramatic growth in mortgage loans. Lending backed by real estate has allowed households to leverage up and has changed the traditional business of banking in fundamental ways. This “Great Mortgaging” has had a profound influence on the dynamics of business cycles. (1)

I was particularly interested by the Letter’s Figure 2, which charted the ratio of mortgage debt to value of the U.S. housing stock over the last hundred years or so. The authors write,

The rise of mortgage lending exceeds what would be expected considering the increase in real estate values over the same time. Rather, it appears to also reflect an increase in household leverage. Although we cannot measure historical loan-to-value ratios directly, household mortgage debt appears to have risen faster than total real estate asset values in many countries including the United States. The resulting record-high leverage ratios can damage household balance sheets and therefore endanger the overall financial system. Figure 2 displays the ratio of household mortgage lending to the value of the total U.S. housing stock over the past 100 years. As the figure shows, that ratio has nearly quadrupled from about 0.15 in 1910 to about 0.5 today. (2)

An increase in leverage for households is not necessarily a bad thing. it allows households to make investments and to smooth their consumption over longer periods. But it can, of course, get to be too high. High leverage makes households less able to handle shocks such as unemployment, divorce and death. it would be helpful for economists to better model a socially optimal level of household leverage in order to guide regulators. The CFPB has taken a stab at this with its relatively new Ability-to-Repay regulation but we do not yet know if they got it right.

The Rescue of Fannie and Freddie

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Federal Reserve researchers, W. Scott Frame, Andreas Fuster, Joseph Tracy and James Vickery, have posted a staff report, The Rescue of Fannie Mae and Freddie Mac. The abstract reads,

We describe and evaluate the measures taken by the U.S. government to rescue Fannie Mae and Freddie Mac in September 2008. We begin by outlining the business model of these two firms and their role in the U.S. housing finance system. Our focus then turns to the sources of financial distress that the firms experienced and the events that ultimately led the government to take action in an effort to stabilize housing and financial markets. We describe the various resolution options available to policymakers at the time and evaluate the success of the choice of conservatorship, and other actions taken, in terms of five objectives that we argue an optimal intervention would have fulfilled. We conclude that the decision to take the firms into conservatorship and invest public funds achieved its short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship led to tensions between maximizing the firms’ value and achieving broader macroeconomic objectives, and, most importantly, it has so far failed to produce reform of the U.S. housing finance system.

 This staff report provides a nice overview of the two companies since the financial crisis. I was particularly interested by a couple of sections. First, I found the discussion of receivership versus conservatorship helpful. Second, I liked how it outlined the five objectives for an optimal intervention:

(i) Fannie Mae and Freddie Mac would be enabled to continue their core securitization and guarantee functions as going concerns, thereby maintaining conforming mortgage credit supply.

(ii) The two firms would continue to honor their agency debt and mortgage-backed securities obligations, given the amount and widely held nature of these securities, especially in leveraged financial institutions, and the potential for financial instability in case of default on these obligations.

(iii) The value of the common and preferred equity in the two firms would be extinguished, reflecting their insolvent financial position.

(iv) The two firms would be managed in a way that would provide flexibility to take into account macroeconomic objectives, rather than just maximizing the private value of their assets.

(v) The structure of the rescue would prompt long-term reform and set in motion the transition to a better system within a reasonable period of time. (14-15)

You’ll have to read the paper to see how they evaluate the five objectives in greater detail.

Affordable Housing for which Low-Income Households?

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The National Low Income Housing Coalition’s latest issue of Housing Spotlight provides its annual examination of “the availability of rental housing affordable to” extremely low income “and low income renter households . . ..” (1) It finds that

the gap between the number of ELI households and the number of rental homes that are both affordable and available to them has grown dramatically since the foreclosure crisis and recession. Despite this growing need, most new rental units being built are only affordable to households with incomes above 50% of AMI. At the same time, the existing stock of federally subsidized housing is shrinking through demolition and contract expirations, and waiting lists for housing assistance remain years long in many communities. Federal housing assistance is so limited that just one out of every four eligible households receives it. (1, emphasis in the original)
The article, “Affordable Housing is Nowhere to be Found for Millions,” describes the role of the National Housing Trust Fund, signed into law by the Housing and Economic Recovery Act of 2008, but only recently funded by Fannie Mae and Freddie Mac:
The NHTF is structured as a block grant to states, and at least 90% of all funding will be used to produce, preserve, rehabilitate and operate rental housing. Further, 75% of rental housing funding must benefit ELI. The funding of the NHTF will make a difference in the lives of many ELI renters by supporting the development and preservation of housing affordable to this income group. However, additional funding to the NHTF will be necessary to assure support to all income eligible households in need of housing. (1, footnote omitted)
The NLIHC’s key findings from this work include,
  • The number of ELI renter households rose from 9.6 million in 2009 to 10.3 million in 2013 and they made up 24% of all renter households in 2013.
  • There was a shortage of 7.1 million affordable rental units available to ELI renter households in 2013. Another way to express this gap is that there were just 31 affordable and available units per 100 ELI renter households. The data show no change from the analysis a year ago.
  • For the 4.1 million renter households DLI renter households in 2013, there was a shortage of 3.4 million affordable rental units available to them. There were just 17 affordable and available units per 100 DLI renter households.
  • Seventy-five percent of ELI renter households spent more than half of their income on rent and utilities; 90% of DLI renter households spent more than half of their income for rent and utilities.
  • In every state, at least 60% of ELI renters paid more than half of their income on rent and utilities. (1)

Given that housing affordability remained a problem during both boom times and bust and given that we should not expect another dramatic expansion of federal subsidies for rental housing, now might be a good time to ask what we can reasonably expect from the Housing Trust Fund. Should it be spread wide and thin, helping many a bit, or narrow and deep, helping a few a lot? No right answers here.

Housing out of Thin Air

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NYU’s Furman Center has posted a policy brief, Creating Affordable Housing out of Thin Air: The Economics of Mandatory Inclusionary Zoning in New York City. It opens,

In May 2014, New York City’s new mayor released an ambitious housing agenda that set forth a multi-pronged, ten-year plan to build or preserve 200,000 units of affordable housing. One of the most talked-about initiatives in the plan was encapsulated in its statement, “In future re-zonings that unlock substantial new housing capacity, the city must require, not simply encourage, the production of affordable housing in order to ensure balanced growth, fair housing opportunity, and diverse neighborhoods.” In other words, the city intends to combine upzoning with mandatory inclusionary zoning in order to increase the supply of affordable housing and promote economic diversity. (1)
Inclusionary zoning, “using land use regulation to link development of market-rate housing units to the creation of affordable housing,” is seen by many as a low-cost policy to support a broader affordable housing approach. (2) There is a limit to the reach of such a program because developers will only build if the overall project pencils out, including any units of mandatory inclusionary zoning.
The policy brief’s conclusions are important:
In many neighborhoods, including some that the city has already targeted for the new program, market rents are too low to justify new mid- and high-rise construction, so additional density would offer no immediate value to developers that could be used to cross-subsidize affordable units. In these areas, inclusionary zoning will need to rely on direct city subsidy for the time being if it is to generate any new units at all regardless of the income level they serve.
Where high rents make additional density valuable, there is capacity to cross-subsidize new affordable units without direct subsidy, but the development of a workable inclusionary zoning policy will be complex. The amount of affordable housing the city could require without dampening the rate of new construction or relying on developers to accept lower financial returns or landowners to be willing to sell at lower prices will vary widely depending on a neighborhood’s market rent, the magnitude of the upzoning, and, to a lesser extent, on the level of affordability required in the rent-restricted units. Where developers must provide the required affordable housing, and whether they can instead pay a fee directly to the city, also bears heavily on the number of affordable units a mandatory inclusionary zoning policy has the potential to generate, but raises other difficult issues. (14-15)
The de Blasio Administration’s housing and land use team is very sophisticated (including the Furman Center’s former director, Vicki Been, now Commissioner at the Department of Housing Preservation and Development), so the City will be well aware of these constraints on a mandatory inclusionary housing program. Nonetheless, it will be of great importance to design a flexible program that can adapt to changing market conditions to ensure that such a program is actually a spur to new development and not merely a well-intentioned initiative.

FIRREA Wall

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Courts have read the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) very broadly, giving the federal government a powerful weapon in its lawsuits against financial institutions regarding events relating to the financial crisis. Judge Swain (SDNY) has issued a rare Opinion and Order limiting the reach of FIRREA, FDIC v. Bear Stearns Asset Backed Securities I LCC et al. (No. 12CV4000, Mar. 24, 2015), a suit over allegedly rotten residential mortgage-backed securities.

The limitation derives from a pretty technical Supreme Court opinion, CTS Corp. v. Waldburger. In CTS, the Supreme Court held that statutes of repose were not preempted by a statute that has identical language as the FDIC Extender Provision found in FIRREA and at issue in FDIC v. Bear Stearns.

I warned you that this is technical, so here is what is at issue:

Claims brought under Section 11 of the 1933 Act are subject to the two-pronged timing provision of Section 13 of that Act, which is codified as 15 U.S.C. § 77m. The first prong of Section 13 is a statute of limitations, which provides that Section 11 claims must be brought within one year of “the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C.S. § 77m (LexisNexis 2012). The statute of limitations may be tolled based on equitable considerations, but not beyond three years from the date of the relevant offering, at which point a plaintiff’s claim is extinguished by Section 13’s second prong – a statute of repose – which provides that “[i]n no event shall any such action be brought . . . more than three years after the security was bona fide offered to the public.” Id.

The FDIC asserts that its claims are timely, notwithstanding the three-year Section 13 statute of repose, because the statute of repose is preempted by the FDIC Extender Provision . . .. (6)

Relying on CTS Corp. v. Wadburger, the Judge Swain concludes that “the FDIC Extender Provision does not preempt the statute of repose set forth in Section 13 of the 1933 Act.” (14-15)

The reasoning in FDIC v. Bear Stearns does not apply to all FIRREA claims, but it would apply to some meaningful subset of them. One of the most powerful things about FIRREA is its very long statute of limitations. If other courts follow FDIC v. Stearns, it could have a meaningful impact on the reach of FIRREA.

Frannie Conservatorships: What A Long, Strange Trip It’s Been

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The Federal Housing Finance Agency Office of Inspector General has posted a White Paper, FHFA’s Conservatorships of Fannie Mae and Freddie Mac: A Long and Complicated Journey. This White Paper on conservatorships updates a first one that OIG published in 2012. This one notes that over the past six years,

FHFA has administered two conservatorships of unprecedented scope and simultaneously served as the regulator for these large, complex companies that dominate the secondary mortgage market and the mortgage securitization sector of the U.S. housing finance industry. Congress granted FHFA sweeping conservatorship authority over the Enterprises. For example, as conservator, FHFA can exercise decision-making authority over the Enterprises’ multi-trillion dollar books of business; it can direct the Enterprises to increase the fees they charge to guarantee mortgage-backed securities; it can mandate changes to the Enterprises’ credit underwriting and servicing standards for single-family and multifamily mortgage products; and it can set policy governing the disposition of the Enterprises’ inventory of approximately 121,000 real estate owned properties. (2)

I was particularly interested by the foreward looking statements contained in this White Paper:

Director Watt has repeatedly asserted that conservatorship “cannot and should not be a permanent state” for the Enterprises. Director Watt has indicated that under his stewardship FHFA will continue the conservatorships and build a bridge to a new housing finance system, whenever that system is put into place by Congress. In this phase of the conservatorships, FHFA seeks to place more decision-making in the hands of the Enterprises. (3)

Those who have been hoping that the FHFA will act decisively in the face of Congressional inaction should let that dream go. And given that just about nobody believes (I still hope though) that there will be Congressional reform of Fannie and Freddie during the remainder of the Obama Administration, we must face the reality that we are stuck with the conservatorships and all of the risks that they foster for the foreseeable future. Today’s risks include historically high rates of mortgage delinquencies and exposure to defaults by counterparties like private mortgage insurers. As I have said before, the risks that Fannie and Freddie are nothing to laugh at. Let’s hope that the FHFA is up to managing them until Congress finally acts.