Author Archives: David Reiss

New Direction for Federal Housing Policy? Finally!

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The Bipartisan Policy Center has released Housing America’s Future: New Directions for National Policy.  The Wall Street Journal reported (behind a paywall) that the report represents a “behind-the-scenes effort to jumpt-start the debate over Fannie’s and Freddie’s future . . ..”  My preliminary thoughts on it:

  • The report’s first key policy objective is exactly right:  “The private sector must play a far greater role in bearing
    credit risk.” (8) I have taken this position for years.  There is no reason that a large share of the credit risk should not be underwritten and borne by the private sector.  That is, after all, what they are supposed to do in free market.  This is not to say that the federal government has no role.  But the current state of affairs — with the government supporting more than 90 percent of home loans — is a recipe for the next housing disaster.
  • The government’s role should be limited to supporting the mortgage market for low- and moderate-income households and to playing the role of lender/insurer of last resort when the mortgage market dries up.
  • The report is again exactly right when it says that Fannie and Freddie should be wound down and replaced with a wholly-owned government entity that will not suffer from the dual mandate of fulfilling a public mission and maximizing profits for its shareholders.
  • The report favors a policy of assisting all very low-income households with their housing expenses.  This is a great and radical step.  But any such policy should take into account the Glaeser and Gyourko’s research that indicates that local land use policy can be at odds with federal housing policy in order to make sure that federal monies are used effectively.

I do not agree with the report in all respects.  Some examples:

  • The report characterizes the FHA as having only one “traditional mission of primarily serving first-time homebuyers.” (8) This characterization repeats the conventional wisdom but the conventional wisdom reads the history of the FHA incorrectly.  I will be posting an article on the history of the FHA later this year that will hopefully set the record straight.  The FHA certainly needs reform, but we should start with all of the relevant facts before jumping in.
  • The report asserts that housing counseling is effective (9) but the empirical evidence is not so clear.  Any policy that devotes significant resources to counseling should be built on a solid basis of empirical support.

Notwithstanding these criticisms, the report is a great first step toward developing a federal housing policy for the 21st Century.  More on the report anon.

Regulating the Distribution of Home Equity

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Ian Ayres and Joshua Mitts have posted Three Proposals for Regulating the Distribution of Home Equity which brings welcomed attention to the systemic risk implications of consumer protection regimes.  In particular, they argue that the proposed Qualfied Residential Mortgage “rules do not effectively address the systemic consequences of mortgage terms which in aggregate can exacerbate market volatility.” (4) They also argue that the new and proposed regulations governing residential mortgages are too static and that they have too many bright line rules that could needlessly reduce variation and innovation for mortgage products.

The authors apply cap and trade to the residential mortgage market in a novel way — one that is is worthy of exploration.  They propose that the government sell mortgage lenders licenses to originate a range of low downpayment mortgages, with the total number capped so as not to pose a systemic risk to the mortgage market.

This is not to say that the paper is flawless.  I find the modeling of the mortgage market overly simplistic.  For instance, its discussion of circuit breaker gaps (an empty range “of equity levels  that can absorb small decreases in prices by keeping homeowners above the range in positive equity”) assumes that LTV ratios at origination will somehow be carried over even when a mortgage is seasoned. (14) That would not be the case.

Its proposal to require that debt-to-income ratios be increased from the 5 years in the proposed regulation to the life of the loan does not seem to take into account the fact that it would kill just about the entire market for ARMs. (32) Given that many ARM products (5/1s ,7/1s, 10/1s) are legitimate and important products, this proposal seems off. (32)

Finally, there is something a bit “turtles all the way down” about the cap and trade proposal. (see 34) The proposal does not let us know how regulators would come up with the optimal (from a systemic risk perspective) distribution of licenses.  Until we know how to answer that question, it will be hard to determine the value of this proposal.

 

Do Foreclosures Cause Crime?

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The Furman Center says yes.  The Center conducted an empirical study in New York City and found that “foreclosure activity appears to be linked to subsequent crime” if “there have been three or more foreclosure notices issued on a blockface.” (4)

The study may give law enforcement agencies something to chew over now (perhaps CrimeStat should track foreclosures?!?), but it should also give those who study housing finance policy something to plan for as we look ahead to the next foreclosure crisis.  If this finding is replicated in other jurisdictions, should federal and state governments put into place any policies and programs that will address this foreseeable consequence of concentrated foreclosures?  The Furman study suggests some policies on its last page.

The GAO’s Take on The FHA

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The Government Accountability Office issued an update to its 2013 HIGH-RISK SERIES.  It had this to say about the Federal Housing Administration:

a new challenge for the markets has also evolved as the decline in private sector participation in housing finance that began with the 2007-2009 financial crisis has resulted in much greater activity by FHA, whose single-family loan insurance portfolio has grown from about $300 billion in 2007 to more than $1.1 trillion in 2012. Although required to maintain capital reserves equal to at least 2 percent of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured. As a result, we are modifying this high-risk area to include FHA and acknowledge the need for actions beyond those already taken to help restore FHA’s financial soundness and define its future role. One such action would be to determine the economic conditions that FHA’s primary insurance fund would be expected to withstand without drawing on the Treasury. Recent events suggest that the 2-percent capital requirement may not be adequate to avoid the need for Treasury support under severe stress scenarios. Additionally, actions to reform GSEs and to implement mortgage market reforms in the Dodd-Frank Act will need to consider the potential impacts on FHA’s risk exposure. (25)

Discussion about the FHA is getting in high gear, in large part because of Ed Pinto.  I expect to take up the issue of the FHA’s appropriate role in the housing market over the coming months and will offer an alternative vision to his.

Reiss on Qualified Mortgages and Fair Housing

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Law360 ran Banks Fear CFPB Rule Could Spur Fair Lending Fights (behind a paywall) which asked for my thoughts:

banks may be getting a bit ahead of themselves when it comes to worrying about how the fair lending law will work in the qualified mortgage context, said David Reiss, a professor at Brooklyn Law School.

Any mortgage that is purchased by Fannie Mae, Freddie Mac and — key for low-income borrowers — the Federal Housing Administration for seven years after the rules take effect in January will be deemed qualified mortgages. The FHA currently backs around $1.1 trillion worth of mortgages.

Unless the FHA drastically reduces its presence in the market that should cover many of the loans that have banks worried, he said.

The banks are not wrong to flag potential problems that may arise in the future, and the issue of fair lending law bumping up against decisions regarding extending only qualified mortgages is a legitimate potential problem, Reiss said.

It’s simply a bit premature with the federal government’s heavy role in the housing finance market.

“They are predicting a scenario, but there’s a lot that’s going to happen between now and that scenario ever being actualized,” Reiss said.

Reiss on Federal Housing Policy

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Law360 ran a story on President Obama’s vision for America’s housing policy and asked for my reaction:

For a piece of mortgage-related legislation to have any chance of passing, it has to require that a borrower pay some kind of down payment so as to remain responsible for at least a small amount of risk, said David Reiss, a professor of real estate and consumer financial services law at Brooklyn Law School.

“What we’ve seen fail pretty consistently is [legislation in which] the homeowner has no skin in the game at all,” and is allowed to obtain a loan — often backed by the government — without putting down a cent, he said.

While this type of policy may help more Americans become homeowners, it does little to fix the housing finance system, which needs a major overhaul, according to Reiss.

“This is the time to reset the market in a rational way, where private lenders make responsible loans because they are doing responsible underwriting,” he said. “Setting up the framework for that should be happening now, even though right now government lending in the residential sector is really the dominant form of lending.”

The rest of the story is here (behind a paywall).

Reiss on Pino Robo-Signing Case

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I had blogged about the case here.  Law360 interviewed me about the broader significance of the case:

Despite its application to just Florida, real estate and foreclosure attorneys around the country have been keeping tabs on the case, according to Brooklyn Law School professor David Reiss. The ruling highlights a trend around the country of foreclosure mills and debt collection firms “making thousands of filings and paying very little attention to whether the filings are accurate,” he said.

Reiss said the court could have taken broader action by stating clearly that fraudulent filings undercut the rule of law.

“You could easily imagine a court saying that the kind of behavior alleged here does impugn the litigation process and [that] the court can take actions to remedy it,” Reiss said. “I’m not saying they made a mistake, but if you are aware of behavior that is taking advantage of the judicial system, I think I can imagine another set of judges saying, ‘We have the inherent authority to handle that.'”

The rest of the story is here (behind a paywall, alas).