Author Archives: David Reiss

State of the Union’s Rental Housing

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The Joint Center for Housing Studies of Harvard University released its report, America’s Rental Housing: Evolving Markets and Needs. The report notes that

Rental housing has always provided a broad choice of homes for people at all phases of life. The recent economic turmoil underscored the many advantages of renting and raised the barriers to homeownership, sparking a surge in demand that has buoyed rental markets across the country. But significant erosion in renter incomes over the past decade has pushed the number of households paying excessive shares of income for housing to record levels. Assistance efforts have failed to keep pace with this escalating need, undermining the nation’s longstanding goal of ensuring decent and affordable housing for all. (1)

The report provides an excellent overview of the current state of the rental housing stock and households. Of particular interest to readers of this blog is how the report addresses the federal government’s role in the housing finance system. The report notes that

During the downturn, most credit sources dried up as property performance deteriorated and the risk of delinquencies mounted. Much as in the owner-occupied market, though, lending activity continued through government-backed channels, with Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) playing an important countercyclical role.

But as the health of the multifamily market improved, private lending revived. According to the Mortgage Bankers Association, banks and thrifts greatly expanded their multifamily lending in 2012, nearly matching the volume for Fannie and Freddie. Given fundamentally sound market conditions, multifamily lending activity should continue to increase. The experience of the last several years, however, clearly testifies to the importance of a government presence in a market that provides homes for millions of Americans, particularly during periods of economic stress. (5)

 The report, to my mind, reflects a complacence about the federal role in housing finance:

Although some have called for winding down Fannie’s and Freddie’s multifamily activities and putting an end to federal backstops beyond FHA, most propose replacing the implicit guarantees of Fannie Mae and Freddie Mac with explicit guarantees for which the federal government would charge a fee. Proposals for a federal backstop differ, however, in whether they require a cap on the average per unit loan size or include an affordability requirement to ensure that credit is available to multifamily properties with lower rents or subsidies. While the details are clearly significant, what is most important is that reform efforts do not lose sight of the critical federal role in ensuring the availability of multifamily financing to help maintain rental affordability, as well as in supporting the market more broadly during economic downturns. (8)

The report gives very little attention to what the federal housing finance system should look like going forward, other than implying that change should be incremental:

To foster further increases in private participation, the Federal Housing Finance Agency (FHFA—the regulator and conservator of the GSEs) has signaled its intent to set a ceiling on the amount of multifamily lending that the GSEs can back in 2013. While the caps are fairly high—$30 billion for Fannie Mae and $26 billion for Freddie Mac—FHFA intends to further reduce GSE lending volumes over the next several years either by lowering these limits or by such actions as restricting loan products, requiring stricter underwriting, or increasing loan pricing. With lending by depository institutions and life insurance companies increasing, the market may well be able to adjust to these restrictions. The bigger question, however, is how the financial reforms now under debate will redefine the government’s role in backstopping the multifamily market. Recent experience clearly demonstrates the importance of federal support for multifamily lending when financial crises drive private lenders out of the market. (27)

I would have preferred to see a positive vision from the Center for how the federal government should go about ensuring liquidity in the market during future crises and how it should support an increase in the affordable housing stock. Perhaps that is asking too much of such a broad report, although the fact that Fannie and Freddie are members of the Center’s Policy Advisory Board which provided funding for the report may have played a role as well. [I might add that I found it odd that the members of the Policy Advisory Board were not listed in the report.]

I do not want to end on a negative note about such a helpful report. I would note that it takes seriously some controversial ideas about increasing the supply of affordable housing.  The report advocates for the reduction of regulatory constraints on affordable rental housing construction. I interpret this as a version of the Glaeser and Gyourko critique of the impact of restrictive local land use regimes on housing affordability. As progressives like NYC’s new Mayor know, restrictive zoning and affordable housing construction are at cross purposes from each other.

How to Make NYC Affordable?

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The Community Service Society released a report, An Affordable Place to Live (written by Waters and Bach). The report is intended to state “What New Yorkers Want From the New Mayor” from the perspective of low-income New Yorkers. Given that Mayor De Blasio campaigned on the theme of a Tale of Two Cities, this report is very timely. It focuses on the “growing mismatch between rents and incomes” which results in low- and moderate-income New Yorkers paying a greater and greater percentage of their income in rent. (1)

The report’s recommendations include

  • eliminating the sizable payments that the New York City Housing Authority must pay to the City so that those monies can be invested in NYCHA’S strained operating and capital budgets.
  • implementing mandatory inclusionary zoning, a policy which the Mayor had highlighted during his campaign.
  • tying real estate tax exemptions to affordable housing.

There are a lot of good ideas in the report. But some of the ideas avoid the tough questions. For instance, the report argues that plans to infill NYCHA land with additional housing should be halted. Such a step would be inconsistent with other proposals in the report such as making affordable housing the highest priority for city-controlled land.

Another drawback of the report is that it did not attempt to quantify how much housing its proposals would actually create or preserve. This may be beyond the scope of what the authors intended, but I was left with the impression that even if many of the proposals were adopted, they would fail to actually make a big dent in the affordability issue that they identify.

That being said, the report is a very helpful contribution to what will be an essential and ongoing policy discussion during the De Blasio Administration.

Social Security Numbers for Mortgages

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McCormick and Calahan have posted Common Ground: The Need for a Universal Mortgage Loan Identifier, a Department of the Treasury Office Financial Research Working Paper (#0012). They argue that

The U.S. mortgage finance system is a critical part of our nation’s financial system, representing 70 percent of U.S. household liabilities. It is also highly complex, with many finance channels, participants, and regulators. The data produced by this system reflect that complexity; unfortunately, no single identifier exists to link the major loan‐level mortgage datasets. The establishment of a single, cradle‐to‐grave, universal mortgage identifier that cannot be linked to individuals using publicly‐available data would significantly benefit regulators and researchers by enabling better integration of the fragmented data produced by the U.S. mortgage finance system. Such an identifier could additionally serve as the foundation of a system that could benefit private market participants, as long as such a system protected individual privacy. (1)

This is a very important initiative, although the privacy concerns are very important to address. Regulators have been many steps behind the private sector in tracking developments in the mortgage markets and a cradle-to-grave identifier, like a Social Security Number for an individual, will help them (and private sector analysts for that matter) to track patterns among  borrowers and loan products.

The authors identify a number of serious privacy concerns:

a mortgage identifier would have to be designed to prevent market participants from re‐identifying individuals. No links from public documents to mortgage identifiers should be allowed. Otherwise the identifier could be used to identify individuals, rendering all datasets containing the identifier personally‐identifiable information. Such a designation would create concerns about the use of individual data in the private sector and trigger burdensome requirements for government researchers using the data. (3)

Researchers have proven resourceful at mashing up data sets to identify supposedly anonymous individuals, so the privacy protections that are ultimately implemented would need to be airtight. That being said, there is a lot of value in working toward the goal of a universal identifier.

Tax Incentives for Sustainable Homeownership

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Harris, Steuerle and Eng have published New Perspectives on Homeownership Tax Incentives in Tax Notes. The report presents

three tax reforms designed to promote homeownership that are fundamentally different from earlier proposals. Many of those earlier proposals would convert existing deductions into credits but would mistakenly, in our view, perpetuate flaws in the current system — namely, the failure to adequately promote the accumulation of home equity. The reforms examined here instead share the common characteristic of subsidizing homeownership through a channel other than the deductibility of mortgage interest, which is the largest tax expenditure for housing. These reforms include a first-time home buyer tax credit, a refundable tax credit for property taxes paid, and an annual flat amount tax credit for homeowners — all largely paid for by restricting the home mortgage interest deduction to a rate of 15 percent. Although far from perfect, these reforms would provide a better and more efficient allocation of housing subsidies and ultimately provide a somewhat larger incentive for wealth accumulation than current policy does. Our simulations show that relative to existing incentives, each policy would raise home prices and make the tax code more progressive. (1315)

This report has some drawbacks, such as overstating the case that empirical studies reinforce “the notion that homeownership improves American communities.” (1315) In fact, the empirical literature is decidedly ambiguous about the spillover and wealth accumulation effects of homeownership, particularly when the last few years are taken into account (I discuss these ambiguities here).

But the report also presents some creative ways to change the incentives that are found in the tax code. They argue, for instance, that it is better to incentivize the accumulation of home equity than unfettered mortgage borrowing. And they make proposals that would do just that.  Worth a read.

Weigh in on Mortgage Closing “Pain Points”

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The Consumer Finance Protection Bureau has issued a Request for Information Regarding the Mortgage Closing Process. The CFPB wants

information from the public about mortgage closing. Specifically, the Consumer Financial Protection Bureau (CFPB) seeks information on key consumer “pain points” associated with mortgage closing and how those pain points might be addressed by market innovations and technology.

The CFPB seeks to encourage the development of a more streamlined, efficient, and educational closing process as the mortgage industry increases its usage of technology, electronic signatures, and paperless processes. The next phase of CFPB’s Know Before You Owe initiative aims to identify ways to improve the mortgage closing process for consumers. This project will encourage interventions that increase consumer knowledge, understanding, and confidence at closing.

This notice seeks information from market participants, consumers, and other stakeholders who work closely with consumers. The information will inform the CFPB’s understanding of what consumers find most problematic about the current closing process and inform the CFPB’s vision for an improved closing experience. (79 F.R. 386)

The CFPB is particularly interested in responses to the following questions:

1. What are common problems or issues consumers face at closing? What parts of the closing process do consumers find confusing or overwhelming?Show citation box

2. Are there specific parts of the closing process that borrowers find particularly helpful?

3. What do consumers remember about closing as related to the overall mortgage/home-buying process? What do consumers remember about closing?

4. How long does the closing process usually take? Do borrowers feel that the time at the closing table was an appropriate amount of time? Is it too long? Too short? Just right?

5. How empowered do consumers seem to feel at closing? Did they come to closing with questions? Did they review the forms beforehand? Did they know that they can request their documents in advance? Did they negotiate?

6. What, if anything, have you found helps consumers understand the terms of the loan? (79 F.R. 387)

It is rare that a federal agency requests information and comments from the Average Joe, Joe Sixpack and Joe the Plumber. So this is a chance for educated consumers of mortgages to be heard at the highest levels about the flaws in the home loan closing process. I encourage readers of REFinblog.com to make their voices heard!

CFPB’s Regulatory Agenda — Collect More Data!

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The Consumer Financial Protection Bureau has published its Semiannual Regulatory Agenda in the Federal Register.  Of note are amendments to the Home Mortgage Disclosure Act’s Regulation C. These amendments are in the prerule stage.  The Agenda states that HMDA

requires certain financial institutions to collect and report information in connection with housing-related loans and applications they receive for such loans. The amendments made by the Dodd-Frank Act expand the scope of information relating to mortgage applications and loans that must be compiled, maintained, and reported under HMDA, including the ages of loan applicants and mortgagors, information relating to the points and fees payable at origination, the difference between the annual percentage rate associated with the loan and benchmark rates for all loans, the term of any prepayment penalty, the value of real property to be pledged as collateral, the term of the loan and of any introductory interest rate for the loan, the presence of contract terms allowing non-amortizing payments, the origination channel, and the credit scores of applicants and mortgagors. The Dodd-Frank Act also provides authority for the CFPB to require other information, including identifiers for loans, parcels, and loan originators. The CFPB expects to begin developing proposed regulations concerning the data to be collected and appropriate format, procedures, information safeguards, and privacy protections for information compiled and reported under HMDA. The CFPB may consider additional revisions to its regulations to accomplish the purposes of HMDA. (1243)

While esoteric for most, this is an important development. The lending industry collects lots of loan-level data. But that data is very expensive to access for academic and policy researchers. Improved loan-level data will better allow government agencies and researchers to study the mortgage market in a timely way. This will allow them (hopefull!) to identify unsustainable and predatory developments more quickly.

In another effort relevant to the mortgage market, the CFPB also noted that it “is continuing rulemaking activities that will further establish the Bureau’s nonbank supervisory authority by defining larger participants of certain markets for consumer financial products and services. Larger participants of such markets, as the Bureau defines by rule, are subject to the Bureau’s supervisory authority.” (1242)

Preserving NYC’s Affordable Housing Stock

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The housing folks in the De Blasio Administration may want to take a look at a recent article in the Journal of Affordable Housing by Sullivan and Power.  Coming Affordable Housing Challenges for Municipalities After the Great Recession (also on SSRN) provides an overview of some modest ways to protect the existing affordable housing stock. Policies such as these can inform the Mayor’s overall affordable housing strategy which will have to emphasize preservation as much as new construction.

The authors note that for “low-income individuals who are to find employment, the disparity between wages and housing affordability is stark.” (298) They also note that while “housing prices have fallen approximately 30 percent since 2006, adjustments in value have done little to ease the financial burden of rental housing.” (2) The article then looks at various opportunities that local governments have to stem the loss of rental units to conversion, demolition and abandonment.

The authors identify three cost-effective and ways that states and local governments may be able to  “curtail the ongoing loss and conversion of affordable housing units . . ..” (308) They can adopt “no net loss” policies that could, for instance require that downzonings of residential communities be matched by upzonings . They can implement “rights of first refusal” that grant governmental and not-for-profit housing agencies “the right to notice of an owner’s intent to sell within a certain time frame and an opportunity to purchase expiring or opting-out affordable housing units.” (310) And local and state governments can amend their building codes to make it easier and cheaper for providers of affordable housing to maintain their properties.

NYC already does some of these things, but it is worth it for the new Mayor to take a fresh look at the City’s approach to preservation to ensure that there are no missed opportunities.