Author Archives: David Reiss

Preserving Low-Income Housing

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NYC Mayor De Blasio announced an aggressive goal of producing and preserving 200,000 units of affordable housing over the next ten years. New York City will need to be as creative as possible to achieve this goal and will need to look to all of the resources that it has at its disposal to achieve it. Enterprise Community Partners released Preserving Housing Credit Investment: The State of Housing Credit Properties and Lessons Learned for the Extended Use Period. This report looks at important component of a preservation agenda: Low-Income Housing Tax Credit buildings that “reach the end of their initial 15-year compliance period.” (4) The report presents data about LIHTC buildings during the 15-year “extended use period” that follow the compliance period

and shares how some state and local housing agencies around the country are addressing the post-Year 15 Housing Credit properties. While the condition of the Housing Credit portfolio at Year 15 is strong, as properties age into a second 15-year period of rent restrictions and beyond, the ability for some of those properties to be able to afford to make improvements while maintaining affordability is clearly a challenge. Some of these local best practices point to solutions demonstrating programmatic and regulatory flexibility, new resources as well as resyndication where appropriate. (4)

Across the nation, roughly 100,000 units of housing age out of the initial compliance period each year, so we are talking about a lot of housing.  New York has a significant portion of that housing stock. While these properties are in pretty good condition overall, the report found that

very limited financing choices exist throughout the extended use period for properties with modest recapitalization or capital improvement needs. Currently, the best choice seems to be a resyndication with a new Housing Credit allocation. However, the use of Housing Credits to preserve and extend the affordability of existing affordable housing competes with other Housing Credit properties, including public housing revitalization and new projects (both as adaptive reuse of existing buildings and new construction). The Housing Credit was created to address affordable housing needs that the private market could not effectively serve. It incentivized a public-private partnership that includes affordability for 30 years. In order to preserve this inventory, more investment will be required. Ensuring the physical and economic stability of these assets through their extended use periods will require innovative uses of limited public subsidy by states and municipalities. (5)

New York City will certainly want to plan for the modest recapitalization of its LIHTC properties as part of its affordable housing strategy. And it will be better to plan for it now than pay too much for deferred maintenance down the line.

U.S. Dismissive of Frannie Suits

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The Federal Housing Finance Agency filed its motion to dismiss all the claims in Perry Capital v. Lew, D.D.C., No. 13-cv-01025, 1/17/14. I blogged about this case (and similar cases) when they were filed last summer. It is quite interesting to read the government’s side of the story now. Today’s post focuses on the federal government’s alternative narrative. Where the private investors describe an opportunistic and abusive government in their complaints, the FHFA’s brief describes the government as a white knight who rode in to save the day at the depth of the financial crisis:

The national crisis having eased, Plaintiffs now ask the Court to re-write the agreements that FHFA, on behalf of the Enterprises, and Treasury executed to stabilize the Enterprises and the national economy, pursuant to express congressional authority. Plaintiffs want to cherry-pick those aspects of the agreements that they like—namely, the unprecedented financial support from Treasury at a time when the Enterprises required billions of dollars in capital—and discard the parts they do not like—namely, the Third Amended PSPAs—now that over one hundred billion dollars of federal taxpayer capital infusions and commitments have allowed the Enterprises to remain in business and produce positive earnings, rather than being placed into mandatory receivership and then liquidation. Plaintiffs’ attempt to reward themselves, at the expense of federal taxpayers who risked and continue to risk billions of dollars to save the Enterprises from receivership and liquidation, directly contravenes the relevant statutory authorities as implemented by the unambiguous language of the PSPAs.

Plaintiffs’ charges of common law and APA violations have it exactly backwards: FHFA, on behalf of the Enterprises, has acted at all times consistent with the Enterprises’ contractual obligations and FHFA’s powers as Conservator and statutory successor to all rights of the Enterprises and their stockholders. The shareholder-Plaintiffs, on the other hand, are attempting through these cases to convince this Court, during the conservatorships, to give shareholders financial value that they are not owed under the terms of their stock certificates or statutes, and to ignore the rights of the Enterprises’ senior preferred stockholder, the U.S. Treasury. By doing so, Plaintiffs seek not only to undermine the purposes of conservatorship, but also the very statutory mission of the Enterprises in which they chose to invest. (4-5)

While I think that the investors raise some serious legal issues for the court to decide, the federal government’s narrative of the financial crisis jibes a whole lot more with my own than does the investors’. I argued last summer that the side that wins control of the narrative will have an advantage in the battle over the legal issues. I would say that the federal government has won this first round.

S&P’s Fightin’ Words

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S&P filed a memorandum in support of its motion to compel discovery in the FIRREA case that the United States brought against S&P last year. S&P comes out fighting in this memorandum, arguing that the “lawsuit is retaliation for S&P’s decision to downgrade the credit rating of the United states in August 2011.” (1)

S&P argues that the “most obvious explanation” for the United States’ “decision to pursue a FIRREA action against S&P alone” among the major rating agencies “is apparent:”   “S&P alone among the major rating agencies downgraded the securities issued by the United States.” (17) This is not obvious to me, particularly given the various explanations for this disparate treatment that have appeared in outlets like the WSJ over the last couple of years. But it may be true nonetheless.

In any case, I do not find the “chronology of events relating to the downgrade and the commencement of this lawsuit” to provide “powerful evidence linking the two.” (17) The chronology ends with the following entries:

  • S&P’s downgrade of the United States occurred on Friday, August 5, 2011. That Sunday, August 7, Harold McGraw III, the Chairman, Chief Executive Officer and President of McGraw Hill (of which S&P was a unit), received a telephone message from a high-ranking official of the New York Federal Reserve Bank; when the call was returned, the official conveyed the personal displeasure of the Secretary of the Treasury with S&P’s rating action.
  • This was followed on Monday by a call to Mr. McGraw from the Secretary of the Treasury, Timothy Geithner, in which Secretary Geithner stated that S&P had made a “huge error” for which it was “accountable.” He said that S&P had done “an enormous disservice to yourselves and your country,” that S&P’s conduct would be “looked at very carefully,” and that such behavior could not occur without a response.
  • The McClatchy Newspapers subsequently reported in a piece authored by Kevin G. Hall and Greg Gordon that while the United States’ original investigation included S&P and Moody’s, “[i]nvestigator interest in Moody’s apparently dropped off around the summer of 2011, about the same time S&P issued the historic downgrade of the United States’ creditworthiness because of mounting debt and deficits.” A source familiar with the investigations was quoted as stating: “After the U.S. downgrade, Moody’s is no longer part of this.”
  • In the year preceding S&P’s downgrade of the United States, two states, Mississippi and Connecticut, had initiated proceedings alleging deceptive practices based specifically on an alleged lack of independence. Each of those states named both Moody’s and S&P as defendants. After the downgrade, additional state lawsuits were commenced, with allegations nearly identical to those of the Connecticut and Mississippi complaints. Drafted after coordination and consultation with the U.S. Department of Justice, none of those lawsuits named Moody’s. (19, footnotes omitted)

This is surely no smoking gun and lots of dots remain to be connected.  How did DoJ get involved? Are the state Attorneys General in on the conspiracy? Why would DoJ stop an investigation of Moody’s to punish S&P? Sounds a bit like cutting off your nose to spite your face?

That being said, S&P might be right about the motivation for this suit and their allegations may be enough to win this motion to compel discovery. But whoever wins this round, this should be a fight worth watching.

Shiller on Primitive Housing Finance

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Robert Shiller has posted Why Is Housing Finance Still Stuck in Such a Primitive Stage? The abstract for this brief discussion paper reads:

The institutions for financing owner-occupied housing have not progressed as they should, and the financial innovation that has followed the financial crisis of 2007-9 has not been focused on improving the risk management of individual homeowners. This paper lists a number of barriers to housing finance innovation, and in light of these barriers, the problems of some major innovations of the past and future: self-amortizing mortgages, price-level adjusted mortgages (PLAMs), shared appreciation mortgages (SAMs), housing partnerships, and continuous workout mortgages (CWMs). (1)

The paper is more of an outline than a fleshed out argument, but it has some interesting points (and not just because the author recently won a Nobel Memorial Prize in Economics).  They include

  • Shared appreciation mortgages (SAMs), which offered some risk management of home price appreciation, were offered by the Bank of Scotland and Bear Stearns in the 1990s, but acquired a damaged reputation with the boom in home prices. U.K. homeowners who took such mortgages, and lost out on the speculative gains, were so angered that they filed a class-action lawsuit against the issuers. The suit was dropped, but the reputation loss was permanent. (5)

  • There has been some questioning of the assumption that insuring homeowners against a decline in home value is a good thing. Sinai and Soulelis (2014) have written that the existing  mortgage institutions may be close to optimal given that people want to live in their house forever, or move to a similar house whose price is correlated with the present house, and so are perfectly hedged. But their paper cannot be exactly right, given the sense of distress that homeowners are experiencing who are underwater. They are more certainly not right about all homeowners, many of whom actually plan to sell their home when they retire. (5-6)

  • The difficulties in making improvements in mortgage institutions have to do with the complexity of the risk management problem, coupled with mistrust of institutional players. The Consumer Financial Protection Bureau, created by the Dodd-Frank Act and having authority over mortgages, among other things, seems oriented towards addressing complaints from the public, and has focused its attention so far on such things as unfair collection practices, bias against minorities, and excessive complexity of financial products being used to confuse customers. These are laudable concerns, but complaints that economists might register about the fundamental success of mortgage products to serve risk management well have not yet taken center stage. (6)

  • New Development economics, Karlan and Appel (2011), Bannerjee and Duflo (2012) has shown how carefully controlled experiments can reveal solid steps to take regarding new financial institutions for poverty reduction. The same methods could be used to improve mortgage institutions, as well as rental, leasing, partnership and cooperative institutions, in advanced countries. (7)

These are just brief thoughts. It will be interesting to see how Shiller develops them further.

Reiss on Death and Mortgages

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Credit.com quoted me in What Happens to Your Mortgage After Death? It reads in part,

Death isn’t on the minds of most homeowners on closing day, naturally, unless it’s a fear of drowning in paperwork. But it’s really never too early to consider what happens to your mortgage should you pass away.

The financial obligation of a home loan does linger after death. There’s a host of scenarios regarding the mortgage’s ultimate disposition, all colored by a homeowner’s estate planning (or lack thereof) and other legal issues.

It isn’t a particularly pleasant topic, but a little bit of planning and paperwork can save your loved ones from considerable headache and hassle during an already difficult time.

“If you’re really thinking about your family’s long-term interests, purchase insurance so they can stay in your home upon your death, and have a will to make everything administratively easy,” said David Reiss, a law professor at Brooklyn Law School in New York.

Keeping the House

Nearly seven in 10 recent homebuyers are married couples, according to the National Association of Realtors, so we’ll focus on them. The co-borrowing spouse will typically be financially liable for the mortgage moving forward.

A spouse who plans to continue living in the home will need to keep current on payments. If you have a life insurance policy in play, your spouse may be able to use the payoff to keep up with or completely wipe out the mortgage balance.

Reiss recommends homeowners consider term life plans rather than actual mortgage term insurance, which can be more expensive.

*     *     *

Older Homeowners

About a third of people 65 and older have a mortgage, according to the U.S. Census. For older homeowners, it’s important to talk with family members about the property’s long-term future.

Children and grandchildren may not share the same desire to keep a house in the family.

“Do you see it as something your family wants to keep?” Reiss said. “You want to make that as financially easy for them as possible.”

Mortgage REITs and Other Frights

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The Office of Financial Research in the Department of the Treasury has released its 2013 Annual Report. It describes a number of things that should scare you as you put your head on your pillow at night and dream of the financial markets. It also describes some important steps that OFR is taking to get a handle on these potential nightmares.

One of the nightmares, relevant to readers of this blog, are Mortgage REITs. Mortgage Real Estate Investment Trusts (REITs) are “leveraged investment vehicles that borrow shorter-term funds in the repo market and invest in longer-term agency mortgage-backed securities (MBS).” (16) OFR identifies serious problems in this subsector:

Mortgage REITs have grown nearly fourfold since 2008 and now own about $350 billion of MBS, or 5 percent of the agency MBS market. Two firms dominate the sector, collectively holding two-thirds of assets. By leveraging investor funds about eight times, mortgage REITs returned annual dividend yields of about 15 percent to their investors over the past four years, when most fixed-income investments earned far less.Mortgage REITs obtain nearly all of their leverage in the repo market, secured by MBS collateral.

Lenders typically require that borrowers pledge 5 percent more collateral than the value of the loan,which implies that a mortgage REIT that is leveraged eight times must pledge more than 90 percent of its MBS portfolio to secure repo financing, leaving few unencumbered assets on its balance sheet. If repo lenders demand significantly more collateral or refuse to extend credit in adverse circumstances, mortgage REITs may be forced to sell MBS holdings. Timely asset liquidation and settlement may not be feasible in some cases, since a large portion of agency MBS trades occurs in a market that settles only once a month . . ..

Although their MBS holdings account for a relatively small share of the market, distress among mortgage REITs could have impacts on the broader repo market because agency MBS accounts for roughly one-third of the collateral in the triparty repo market. Mortgage REITs also embody interest rate and convexity risks, concentration risk, and leverage. For these reasons, forced-asset sales by mortgage REITs could amplify price declines and volatility in the MBS market and  broader funding markets, particularly in an already stressed market. (17)

Sounds like systemic risk to me.

Happily, the report also contains policy proposals to address some of these systemic risk concerns. First and foremost, it proposes the adoption of a Financial Stability Monitor tool to track financial threats. The OFR also proposes mortgage-specific tools. Reiterating the findings in a recent OFR white paper, the report calls for the creation of a universal mortgage identifier so that regulators and researchers can more quickly identify patterns in the mortgage market. Predicting financial crises is still more of an art than a science but it is a good development that OFR is trying to improve the quality of the data that regulators and researchers have about the financial market.

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.