Author Archives: David Reiss

Frannie v. Private-Label Smackdown

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Eric Armstrong

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?

California Dreamin’ of Affordable Housing

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Architecturist

Just A Dream for Many

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.

Primer on NYC Affordability Crisis

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"2014 July NYC's 432 Park Avenue" by The Hornet

Enterprise has released a report, 2015 New York City Housing Security Profile and Affordability Housing Gap Analysis. Its conclusions are not shocking, but they are sobering:

  • Of 2 million renter households in New York City, nearly 640,000 are low-income and severely cost-burdened.
  • There is not a single neighborhood in NYC that provides enough affordable housing to match the number of very low-income households in that community.
  • Both the regulated and unregulated rental housing markets of NYC are not meeting the affordable housing needs of low-income renters.
  • Even though the market added rent stabilized units between 2011 and 2014, the stock affordable to lower income families declined.
  • Competition exacerbates the gap between the number affordable units and the number of low-income renters, forcing many to pay beyond their means. (33)

As with many such studies, it offers a cogent analysis of the problem but offers very little by way of possible solutions. It hints at one such solution when it notes that

By any measure, the demand for affordable housing in New York City outstrips supply – even on the rent regulated market. Low-income households are squeezed even further by competition from higher income households for the cheapest units. The acute shortage forces the majority of lower income households in housing that costs beyond their means. (27)

Increasing the supply of housing will, if everything else is equal, reduce the cost of housing. The de Blasio Administration is certainly on board with an approach to increase density in NYC but many other elected officials are not — or at least resist it when it comes to their own backyards.  While more housing is not a sufficient solution to the affordability problem in NYC, it is certainly a necessary component of a solution.

The report also does not deal with the big elephant in the affordable housing policy room — the social demographics of NYC are undergoing a secular shift as the city gets hotter and hotter for global elites. It is unclear how much government can affect that trend, particularly at the local level.

What’s Pushing Down The Homeownership Rate?

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USDA New Homeowner

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.

Systemic Servicing Failure

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Joseph A. Smith, Jr.

Joseph A. Smith, Jr.

Joseph A. Smith, Jr., the Monitor of the National Mortgage Settlement, issued An Update on Ocwen’s Compliance. It opens,

I filed a compliance report with the United States District Court for the District of Columbia (the Court) today that provides the results of my tests on Ocwen’s compliance with the National Mortgage Settlement (Settlement or NMS) servicing standards during the third and fourth calendar quarters of 2014. (2)

The Monitor found that Ocwen (which has been subject to numerous complaints) failed at least four metrics and a total of ten metrics are subject to some type of corrective action plan. As with many of these reports, the prose is turgid, but the subject is of great concern to borrowers who have mortgages serviced by Ocwen.  Problems were found with

  1. the timeliness, accuracy and completeness of pre-foreclosure initiation notification letters
  2. the propriety of default-related fees
  3. compliance with short sale notification requirements regarding missing documents
  4. providing the reason and factual basis for various denials

The Monitor concludes, “The work involved to date has been extensive, but Ocwen still has more work to do. I will continue to report to the Court and to the public on Ocwen’s progress in an ongoing and transparent manner.” (5) This sounds like bureaucratic understatement to me.  Each of these failures has a major impact on the homeowners who are subject to it.

The Kafka-esque stories of homeowners dealing with servicers gone wild are graphic and frightening when a home is on the line. And when I read the corrective actions that the Monitor is implementing, it reads more like my 6th grader’s report card than like a plan for a massive corporation. One of them is “ensuring accuracy of dates used in letters.” (Appendix ii) Hard to imagine a grown up CEO needing to be told that.

I have wondered before how a company under court-ordered supervision could continue to behave like this. I remain perplexed — and even a bit disgusted.

The Low Cost of Homeownership

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plumbing-840835_1920

TheStreet.com quoted me in Why the Extra Costs of Owning a Home Are Lower Than Consumer Expectations. It reads, in part,

First-time homebuyers are often apprehensive about the extra costs of owning a house, fearful that routine maintenance and repairs will add up quickly, exceeding their original budget.

But their estimates about replacing air filters, mowing the lawn and conducting minor repairs are often much higher than average costs. Consumers have trouble estimating the actual amount and said it would cost $15,070 for home maintenance repairs each year, according to a recent survey by NeighborWorks America, a Washington, D.C-based organization focused on affordable housing.

The actual amount is more likely to be in the range of 1% to 3% of a home’s value or $2,000 to $6,000 nationwide, said Douglas Robinson, a spokesman for NeighborWorks America. Even some current homeowners’ estimates were above the average amount and predicted repairs to cost $12,360. The perception among current renters was even worse with a prediction of $20,503.

“The important thing to remember about buying a home is that there are costs after the purchase that go beyond the monthly mortgage,” he said. “By setting up a savings plan and budget for these costs – items such as landscaping, air conditioning and heating system maintenance – a homeowner will be better equipped to take on the expenses without having to use a credit card or worse, a high-cost emergency loan.”

*      *     *

Home Emergencies

While they might appear to be rare, homeowners annually should prepare themselves to handle at least one unexpected major emergency such as replacing the boiler or roof in the aftermath of a major storm or flooding in the basement where water needs to be pumped out immediately to protect the foundation, said David Reiss, a law professor at Brooklyn Law School. Establishing an emergency fund would help protect a homeowner when these problems arise so consumers are not forced to turn to more expensive options of debt such as credit cards.

“If a homeowner has an emergency fund, he or she will feel like a genius when it comes time to use it,” he said. “The next step, of course, is to start saving up immediately for the next problem because as most homeowners know – there will be a next problem.”

Some homeowners might find that chronic problems such as the leaky roof are worse than the “acute ones such as the boiler giving out in the winter,” Reiss said.

“This is because we will do whatever it takes to turn the heat back on,” he said. “But we learn to live with the occasional leak and end up feeling like we can ignore it. However, water damage is bad for a house and always gets worse.”

Buy-To-Rent Investing

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"Foreclosedhome" by User:Brendel

James Mills, Raven Molloy and Rebecca Zarutskie have posted Large-Scale Buy-to-Rent Investors in the Single-Family Housing Market: The Emergence of a New Asset Class? to SSRN. The abstract reads,

In 2012, several large firms began purchasing single-family homes with the stated intention of creating large portfolios of rental property. We present the first systematic evidence on how this new investor activity differs from that of other investors in the housing market. Many aspects of buy-to-rent investor behavior are consistent with holding property for rent rather than reselling quickly. Additionally, the large size of these investors imparts a few important advantages. In the short run, this investment activity appears to have supported house prices in the areas where it is concentrated. The longer-run impacts remain to be seen.

I had been very skeptical of this asset class when it first appeared, thinking that the housing crisis presented a one-time opportunity for investors to profit from this type of investment. The conventional wisdom had been that it was too hard to manage so many units scattered over so much territory. The authors identify reasons to think that that conventional wisdom is now outdated:

To the extent that technological improvements, economies of scale, and lower financing costs have substantially reduced the operating costs of buy-to-rent investors relative to smaller investors, large portfolios of single-family rental property may become a permanent feature of the real estate market. As such, the events of the past three years may signal the emergence of a new class of real estate asset. A similar transformation occurred in the market for multifamily structures in the 1990s, when large firms began to purchase multifamily property and created portfolios of professionally-managed multifamily units that were traded on public stock exchanges as REITs. (32-33)

Nonetheless, the authors are cautious (rightfully so, as far as I am concerned) in their predictions: “only time will tell whether the recent purchases of large-scale buy-to-rent investors reflect the emergence of a new asset class or whether the business model will fail to be viable over the longer-term.” (33, footnote omitted)