December 11, 2015
Feds Financing Multifamily
The Congressional Budget Office has released The Federal Role in the Financing of Multifamily Rental Properties. The report opens,
Multifamily properties—those with five or more units— provide shelter for approximately one-third of the more than 100 million renters in the United States and account for about 14 percent of all housing units. Mortgages carrying an actual or implied federal guarantee have been an important source of financing for acquiring, developing, and rehabilitating multifamily properties, particularly after the collapse in house prices and credit availability that accompanied the 2008–2009 recession. According to the Federal Reserve, the share of outstanding multifamily mortgages carrying such a guarantee increased by 10 percentage points, from 33 percent at the beginning of 2005 to 43 percent at the end of the third quarter of 2014. (A slightly larger increase of about 16 percentage points occurred in the federal government’s market share of the much larger single-family market.) Such guarantees are made by a variety of entities, and some policymakers are looking for ways to make the federal government’s involvement more effective. Other policymakers have expressed concern about that expanded federal role and are looking at ways to reduce it. (1)
This debate is, of course, key to housing policy more generally: to what extent should the government be involved in the provision of credit in that sector?
This report does a nice job of summarizing the state of the multifamily housing sector, particularly since the financial crisis. It provides an overview of federal mortgage guarantees for multifamily projects and reviews the choices that Congress faces when it decides to determine Fannie and Freddie’s fate. That is, should we have a federal agency guarantee multifamily mortgages; take a hybrid public/private approach; authorize a federal guarantor of last resort; or take a largely private approach?
We should start by asking if there is a market failure in the housing finance sector and then ask how the government should intercede to correct that market failure. My own sense is that we intercede too much and we should move toward a federal guarantor of last resort with additional support for the low- and moderate-income subsector of the market.
December 11, 2015 | Permalink | No Comments
December 10, 2015
Using Homeowners Insurance
Univision quoted me in When to Use Your Home Insurance Policy (Cuándo Usar la Póliza de Seguro del Hogar). It opens,
It is not advisable to use your homeowners insurance every time something breaks. Find out why and learn when it’s the best time to file a claim and when to avoid it.
As explained by David Reiss, Professor and Research Director at Brooklyn Law School’s Center for Urban Business Entrepreneurship, it is important to think carefully about the consequences of making a claim for a small loss.
We leave you with several issues you should consider when deciding whether to file a claim.
Is the payment worth the effort?
Generally, the homeowner will be responsible for the first part of the loss in an amount equal to the deductible of the policy. “So if the policy has a $1,000 deductible, and there was a $1,500 loss, only $500 at most would be paid by the insurance company,” said the expert.
Many claims, canceled policy!
After a homeowner files multiple claims, many insurance companies may cancel a policy. Reiss recommends that you determine how this would work beforehand.
Thanks to Ana Puello for assistance with the translation.
December 10, 2015 | Permalink | No Comments
Thursday’s Advocacy & Think Round-Up
- The Harvard Joint Center for Housing Studies has released America’s Rental Housing: Expanding Options for Diverse and Growing Demand in which it finds that the last ten years have seem an unprecedented growth in the demand for rental housing.
December 10, 2015 | Permalink | No Comments
December 9, 2015
Paid off Mortgage in Three Years
Sean Cooper
Realtor.com quoted me in Why the Guy Who Paid Off His Mortgage in 3 Years Isn’t as Smart as You Think. You’ll want to read about this guy:
You’ve gotta hand it to Sean Cooper: In a mere three years, this Toronto homeowner made epic sacrifices to pay off a $255,000 mortgage on his $425,000 house. His reason: “For a lot of people, their mortgage is like a life sentence,” the 30-year-old explained to the press. “I just wanted to not have a mortgage hanging over my head.”
After his story broke in publications such as the Toronto Star and The Hamilton Spectator, thousands applauded this as a feat of frugality.
But some experts say the opposite—that Cooper made a colossal mistake.
Forget the fact that to pay off his mortgage this pension analyst took on two extra jobs (including in the meat section of a supermarket even though he’s a vegetarian) and worked over 100 hours per week. Let’s also set aside the fact that he stopped using his car and claims Kraft dinners were his “best friend” (because clearly his real friends stopped hanging out with him). No, experts argue that Cooper’s extreme mortgage-paying regimen may have actually damaged his financial health.
* * *
“Having a mortgage is not really such a bad thing,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “When you think about what a mortgage is, it makes sense to pay it off over a long period of time. You use a mortgage to buy something that will last a long time—a home—so you would probably want to spread the payments for that expensive thing over the whole period you’re using it, just as you would with a car. [Cooper’s paying off his mortgage quickly] may work for him, but not for the typical person.”
So if you’re inspired to follow in Cooper’s footsteps, think twice and consider less drastic measures.
“There are less extreme ways of doing this,” Reiss says. “Some people make payments every four weeks instead of every month. This results in one extra payment every year and does not seem so painful. Others will put extra payments into their mortgage—a tax refund, a bonus, money from a consulting gig. This is also less painful because you were probably paying your regular expenses without that money already.”
Bottom line: Don’t beat yourself up for having a mortgage. Embrace the benefits, relax, and live a little. Cooper, for one, is now playing catch-up. Now that he’s debt-free, he’s moved on to his next goal: He’s looking for love. Because let’s face it, most bachelorettes aren’t into eating mac ‘n’ cheese on a date.
December 9, 2015 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Round-Up
- President Obama recently signed the Fixing America’s Surface Transportation Act into law. The legislation contains numerous provisions related to housing including, “pay for success” housing demonstration in which private contractors will enter into contracts to upgrade the efficacy of federal housing, and be compensated based on the effectiveness of their work.
- The U.S. Department of Housing and Urban Development has proposed a new rule aimed at combating gender discrimination in the provision of housing services. Among other things, Equal Access to Housing in HUD Programs, Regardless of Sexual Orientation or Gender Identity prohibits inquiries into the gender and sexual status of tenants by housing providers.
December 8, 2015 | Permalink | No Comments
December 8, 2015
Reviewing the Big Short
By David Reiss
Wax Statue of Ryan Gosling at Madame Tussauds
Realtor.com quoted me in Explaining the Housing Crash With Jenga—Did ‘The Big Short’ Get It Right? The story reads in part,
One of the more hyped movie releases this Oscar season stars the housing crisis itself: “The Big Short,” in which four financial wheelers and dealers (Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt) join forces to figure out what caused the housing bubble of 2003-2005 to burst (and how they could profit from it, of course). It’s based on the best-selling, intensively reported book by journalist Michael Lewis.
Granted, the subprime mortgage meltdown is a complicated subject… but this movie purports to illuminate all with a simple visual aid: a tower of Jenga blocks. As Gosling explains in [this video clip], mortgage bonds at that time were made up of layers called tranches, with the highest-rated and most secure loans stacked on top of the lower-rated “subprime” ones. And once holders of those subprime mortgages defaulted in droves, as they did starting in 2006, the whole structure collapsed. Jenga!
Which seems simple enough. Only is this depiction accurate, or just a Hollywood set piece?
Well, according to David Reiss, Research Director at the Center for Urban Business Entrepreneurship at Brooklyn Law School, this movie’s high-concept depiction of the mortgage crisis is largely on the money.
“There is a lot that is accurate in the clip: the history of mortgage-backed securities, the degradation of mortgage quality during the subprime boom, the loss of value of lower grade tranches,” he says.
* * *
Yet there is one thing that the movie did fudge, according to Reiss.
“I would argue that there is one big inaccuracy that exists, I am sure, for dramatic effect,” he says. “I would have put the AAA [tranches] at the bottom of the Jenga stack. In fact, the failure of the Bs and BBs did not cause the failure of AAAs, and many AAAs survived just fine or with modest losses.”
In other words, only the top half of the Jenga tower should have crumbled … but that wouldn’t have looked quite as flashy, would it?
“It would not sound as cool if only the top part of the stack crashed,” Reiss concedes. “But the bigger point, that the failures of the secondary mortgage market led to the crash of the housing market, is spot on.”
And hopefully one that won’t play out again in real life.
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December 8, 2015 | Permalink | No Comments