November 13, 2015
Fannie, Freddie & The Affordable Housing Feint
Robert J. Shapiro
Elaine C. Kamarck
Robert J. Shapiro and Elaine C. Kamarck have posted A Strategy to Promote Affordable Housing for All Americans By Recapitalizing Fannie Mae and Freddie Mac. While it presents as a plan to fund affordable housing, the biggest winners would be speculators who bought up shares of Fannie and Freddie stock and who may end up with nothing if a plan like this is not adopted. The Executive Summary states that
This study presents a strategy for ending the current conservatorship and majority government ownership of Fannie and Freddie in a way that will enable them, once again, to effectively promote greater homeownership by average Americans and greater access to affordable housing by low-income households. This strategy includes regulation of both enterprises to prevent a recurrence of their effective insolvency in 2008 and the associated bailouts, including 4.0% capital reserves, regular financial monitoring, examinations and risk assessments by the Federal Housing Finance Agency (FHFA), as dictated by HERA. Notably, an internal Treasury analysis in 2011 recommended capital requirements, consistent with the Basel III accords, of 3.0% to 4.0%. In addition, the President should name a substantial share of the boards of both enterprises, to act as public interest directors. The strategy has four basic elements to ensure that Fannie and Freddie can rebuild the capital required to responsibly carry out their basic missions, absorb losses from future housing downturns, and expand their efforts to support access to affordable housing for all households:
- In recognition of Fannie and Freddie’s repayments to the Treasury of $239 billion, some $50 billion more than they received in bailout payments, the Treasury would write off any remaining balance owed by the enterprises under the “Preferred Stock Purchase Agreements” (PSPAs).
- The Treasury also would end its quarterly claim or “sweep” of the profits earned by Fannie and Freddie, so their future retained earnings can be used to build their capital reserves.
- Fannie and Freddie also should raise roughly $100 billion in additional capital through several rounds of new common stock sales into the market.
- The Treasury should transfer its warrants for 79.9% of Fannie and Freddie’s current common shares to the HTF [Housing Trust Fund] and the CMF [Capital Magnet Fund], which could sell the shares in a series of secondary stock offerings and use the proceeds, estimated at $100 billion, to endow their efforts to expand access to affordable housing for even very low-income households.
Under this strategy, Fannie and Freddie could once again ensure the liquidity and stability of U.S. housing markets, under prudent financial constraints and less exposure to the risks of mortgage defaults. The strategy would dilute the common shares holdings of current private investors from 20% to 10%, while increasing their value as Fannie and Freddie restore and claim their profitability. Finally, the strategy would establish very substantial support through the HTF and CPM for state programs that increase access to affordable rental housing by very low-income American and affordable home ownership by low-to-moderate income households.
Wow — there is a lot that is very bad about this plan. Where to begin? First, we would return to the same public/private hybrid model for Fannie and Freddie that got us into so much trouble to begin with.
Second, it would it would reward speculators in Fannie and Freddie stock. That is not terrible in itself, but the question would be — why would you want to? The reason given here would be to put a massive amount of money into affordable housing. That seems like a good rationale, until you realize that that money would just be an accounting move from one federal government account to another. It does not expand the pie, it just makes one slice bigger and one slice smaller. This is a good way to get buy-in from some constituencies in the housing industry, but from a broader public policy perspective, it is just a shuffling around of resources.
There’s more to say, but this blog post has gone on long enough. Fannie and Freddie need to be reformed, but this is not the way to do it.
November 13, 2015 | Permalink | No Comments
Friday’s Government Reports
- The Federal Housing Finance Agency (FHFA) announced that it plans to expand the Neighborhood Stabilization Initiative into 18 additional Metropolitan areas -the program gives community organizations an “advanced first look” opportunity to purchase foreclosed Fannie Mae and Freddie Mac properties, before they are offered to the general public. This interactive map provides more detail about the 18 Metropolitan areas targeted by the program.
- FHFA has also released it’s Annual Housing Report for the 2014 activities of Fannie Mae & Freddie Mac – in 2014 they acquired $584 billion of loans on single-family owner-occupied housing and provided funding for 738,466 multifamily rental units in 2014.
- U.S. Department of Housing and Urban Development (HUD) releases it’s 50th Anniversary Commemorative Book, in which NYU’s Furman Center Contributes a chapter, Race, Poverty & Federal Rental Housing Policy discussing the key goals of the agency, evaluating its progress and identifying “key tensions running through its work.” In another Chapter, Housing Finance in Retrospective authors Wachter & Acolin trace the impact of HUD on the U.S. market.
November 13, 2015 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Round-Up
- The Center on Budget and Policy Priorities has released a report Realizing the Housing Voucher Program’s Potential to Enable Families to Move to Better Neighborhoods in which it recommends key changes which would lead to long term upward mobility for families using housing vouchers – chief among their goals is encouraging recipients relocation to lower poverty neighborhoods.
- Corelogic’s September 2015 National Foreclosure Report in which it finds the number of foreclosures down 1.3% since August, and foreclosure inventory is down 23.4% since September 2014.
- The Mercatus Center at George Mason University’s How Land Use Regulation Undermines Affordable Housing concludes that most regulation lead to higher costs (over free market prices) which disproportionately accrues to lower income citizens.
- Seeking Alpha blogger proposes that rather than a QE4 the Fed should arrange Student Loan Property Bond to restore growth. This is how it would work: “The Fed would convert that loan into a Property Bond that pays off the $29,000 loan and advances an additional $29,000 to the student for the home deposit in return for taking a 10% stake in the acquired property. There would be no dividend attached to the Property Bond – the Fed’s return would come from the home price appreciation… The main owner of the property could later choose when the Fed realizes [sic] its return – it could be at the sale of the first home or rolled over onto subsequent purchases until, ultimately, the death of the main owner.”
November 12, 2015 | Permalink | No Comments
November 11, 2015
Property Tax Exemptions in Wonderland
NYU’s Furman Center has released a policy brief, The Latest Legislative Reform of the 421-a Tax Exemption: A Look at Possible Outcomes. This brief is part of a series on affordable housing strategies for a high-cost city. It opens,
Since the early 1970s, New York City has provided a state-authorized, partial property tax exemption for the construction of new residential buildings. In the 1980s, the New York City Council amended the program to require that participating residential buildings in certain portions of Manhattan also provide affordable housing. Most recently, New York State extended the existing program through the end of 2015 and created a new 421-a framework for 2016 onward. However, for the program to continue beyond December, the legislation requires that representatives of residential real estate developers and construction labor unions reach a memorandum of understanding regarding wages of construction workers building 421-a program developments that contain more than 15 units.
This brief explores the possible impacts of the new 421-a legislation on residential development across a range of different neighborhoods in New York City, including neighborhoods where rents and sale prices are far lower than in the Manhattan Core and where the tax exemption or other subsidy may be necessary to spur new residential construction under current market conditions. We assess what could happen to new market rate and affordable housing production if the 421-a program were allowed to expire or if it were to continue past 2015 in the form contemplated by recently passed legislation. Our analysis shows that changes to the 421-a program could significantly affect the development of both market rate and affordable housing in the city (1, footnote omitted)
The 421-a program operates against the backdrop of a crazy quilt real property tax regime where similar buildings are taxed at wildly different rates because of various historical oddities and thinly-sliced legal distinctions. Like the Queen of Hearts, the rationale given by the Department of Finance for this unequal treatment amounts to no more than — And the reason is…because I say so, that’s why!
The brief concludes,
Our financial analysis of the possible outcomes from the 421-a legislation offers some insights into its potential impact on new construction. First, if the 421-a benefit expires in 2016, residential developers would lower the amount they would be willing to pay for land in many parts of the city. The result could be a pause in new residential developments in areas outside of the Manhattan Core as both buyers and sellers of land adjust to the new market.
* * *
Second, if the newly revised 421-a program with its higher affordability requirements and longer exemption period goes into effect in 2016 without any increase in construction costs, the city is likely to have more affordable rental units developed in many parts of the city compared to what the existing 421-a program would have created. Condominium development without the 421-a program may still continue to dominate in certain portions of Manhattan, though the program appears to make rentals more attractive. (12)
The first outcome — lower land prices if 421-a expires — is not that bad for anyone, except current landowners. And it is hard to feel bad for them, given that they should not have expected that 421-a would remain in effect forever (and not to mention the rapid increases in NYC land prices). The second outcome — the new 421-a framework — sounds like better public policy than the existing program.
But one wonders — what would it take for NYC to develop a rational real property tax regime to replace our notoriously inequitable one, one that treats like properties so differently from each other. Can we escape from Wonderland?
November 11, 2015 | Permalink | No Comments
Wednesday’s Academic Roundup
- The Value of Manufactured Housing Communities: A Dual-Ownership Model, Charles Becker & Ashley Yea, Economic Research Initiatives at Duke (ERID) Working Paper No. 196.
- Liquidity Provision, Credit Risk and the Bond Spread: New Evidence from the Subprime Mortgage Market, Xudong An & Timothy J. Riddiough.
- Mortgage Market Flexibility and the Transmission of House Price Shocks: A Multi-Country Study, Peter Reusens.
- Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?, Andra C. Ghent, Ruben Hernandez-Murillo, & Michael Owyang, Real Estate Economics, Vol. 43, Issue 4, pp. 820-854, 2015 (Paid Access).
- Introduction to Special Issue: Government Involvement in Residential Mortgage Markets, W. Scott Frame, Real Estate Economics, Vol. 43, Issue 4, pp. 807-819, 2015 (Paid Access).
- No Parking Anytime: The Legality and Wisdom of Maximum Parking and Minimum Density Requirements, Michael Lewyn & Judd Schechtman Rosenman, 54 Washburn L.J. 285 (2015).
- Defining Power Property Expectations, Michael Pappas, 45 Environmental Law Reporter 10542 (2015).
- The Nonprime Mortgage Crisis and Positive Feedback Lending, Bernard S. Black, Charles K. Whitehead & Jennifer Mitchell Coupland, Northwestern Law & Econ Research Paper, Cornell Legal Studies Research Paper, & ECGI – Law Working Paper.
- Longitudinal Analysis of Violence and Housing Insecurity, Timothy M. Diette & David Ribar, IZA Discussion Paper No. 9452.
- Strategies Aimed at Mitigating Liquidity Risk in the Aftermath of the Recent Financial Crisis, Johnson Owusu-Amoako, 5th International Conference on Engaged Management Scholarship: Baltimore, Maryland, September 10-13, 2015.
- American Dreams, American Realities, Michael Lewyn, 44 Real Est. L.J. 292 (2015).
- House Prices and Consumer Spending, David Berger, Veronica Guerrieri, Guido Lorenzoni & Joseph Vavra, NBER Working Paper No. w21667 (Paid Access).
November 11, 2015 | Permalink | No Comments
November 10, 2015
Home Buyers & Home Sellers
The National Association of Realtors has issued its 2015 Profile of Home Buyers and Sellers (highlights only at this link). The profile derives from NAR’s annual survey of recent home buyers and sellers. NAR found that
Demographics continue to shift as the share of first-time home buyers dropped further from last year’s report to 32 percent of the market. This is second only to the lowest share reported in 1987 of 30 percent. Last year’s report had a share of first-time buyers of 33 percent. First-time home buyers are traditionally more likely to be single male or female home buyers and traditionally have lower incomes. As the share of repeat buyers continues to rise, the number of married couples increases and the income of home buyers purchasing homes is higher. Married couples have double the buying power of single home buyers in the market and may be better able to meet the price increases of the housing market. (5)
This adds to the findings of a variety of earlier studies that have described long-term demographic trends that will affect the housing market in very big ways.
I was particularly intrigued by one finding about sellers,
Increased prices are also impacting sellers. Tenure in the home had risen to a peak of 10 years, but in this year’s report it has eased back to nine years. Historically, tenure in the home has been six to seven years. Sellers may now have the equity and buyer demand to sell their home after stalling or delaying their home sale. (5)
This is a dramatic change and reflects the the long-term effects of the Great Recession — just as people delayed buying a new car after the financial crisis, they also delayed purchasing a new home. It’s just that they delay takes longer to see.
The report also has a series of highlights about houses, brokers and mortgages that are worth a looksee.
November 10, 2015 | Permalink | No Comments
November 12, 2015
RMBS 3.0 and the Public Good
By David Reiss
The Structured Finance Industry Group has issued RMBS 3.0: A Comprehensive Set of Proposed Industry Standards to Promote Growth in the Private Label Securities Market. RMBS 3.0 is SFIG’s initiative to reinvigorate the “private label” residential mortgage-backed securities (“RMBS”) market:
In order to improve the RMBS market as the industry moves beyond the legacy of the housing crisis, members must tackle the difficult but critical task of creating standardized representations, warranties and repurchase enforcement mechanisms, and address other integral parts of the RMBS issuance process.
Post-crisis, a very small “RMBS 2.0” market has emerged. A review of RMBS 2.0 practices indicates that post-crisis transactions have utilized varying approaches as investors and issuers continue to explore how to best design the structural elements of an RMBS transaction. In a number of cases, divergence among the various approaches has significantly influenced rating agency decisions and limited investor participation. Most industry participants seem to believe that, without a targeted effort at establishing generally accepted best practices, the RMBS market will continue to reflect disparate standards. (1)
In particular,
By identifying, analyzing, explaining and creating solutions for the legal, operational and risk-related issues that concern post-crisis RMBS industry participants, and presenting the work in a centralized, user-friendly manner, RMBS 3.0 seeks to:
1. Create standardization where possible, in a manner that reflects widely agreed upon best practices and procedures.
2. Clarify differences in alternative standards in a centralized and easily comprehendible manner to improve transparency across RMBS transactions.
3. Develop new solutions to the challenges that impede the emergence of a sustainable, scalable and fluid post-crisis RMBS market.
4. Draft or endorse model contractual provisions, or alternative “benchmark” structural approaches, where appropriate to reflect the foregoing.
While SFIG cannot create legally enforceable standards, we strongly believe that the adoption of a set of common standards that are driven by industry participants will be more successful than those dictated by regulation. The project also aims for increased transparency in the practices of participating members. Accordingly, we encourage issuers to either adopt one or more of the “alternative benchmark” RMBS 3.0 standards or utilize alternative approaches in a manner that increases transparency and promotes a better functioning marketplace. (1-2)
Given the rotten state of the private label market, this is an important attempt at self-regulation by this trade group. The push for transparency is, of course, important for investors. They must have confidence in what they are buying if the RMBS market is to grow.
But these decisions will also have impacts on homeowners. For instance, the scope of “materiality” in the context of a fraud representation could impact lender behavior at origination. The public does not have an opportunity to provide input on these model representations. Perhaps it should.
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November 12, 2015 | Permalink | No Comments