September 30, 2015
Inclusionary Housing and Equitable Communities
The Lincoln Institute of Land Policy has released a policy focus report, Inclusionary Housing: Creating and Maintaining Equitable Communities. The Executive Summary opens,
After decades of disinvestment, American cities are rebounding, but new development is often driving housing costs higher and displacing lower-income residents. For cities struggling to maintain economic integration, inclusionary housing is one of the most promising strategies available to ensure that the benefits of development are shared widely. More than 500 communities have developed inclusionary housing policies, which require developers of new market-rate real estate to provide affordable units as well. Economically diverse communities not only benefit low-income households; they enhance the lives of neighbors in market-rate housing as well. To realize the full benefit of this approach, however, policies must be designed with care. (3)
The report uses the term inclusionary zoning to refer to
a range of local policies that tap the economic gains from rising real estate values to create affordable housing—tying the creation of homes for low- or moderate-income households to the construction of market-rate residential or commercial development. In its simplest form, an inclusionary housing program might require developers to sell or rent 10 to 30 percent of new residential units to lower-income residents. Inclusionary housing policies are sometimes referred to as “inclusionary zoning” because this type of requirement might be implemented through an area’s zoning code; however, many programs impose similar requirements outside the zoning code. (7)
The report notes that
Policy makers are understandably concerned that affordable housing requirements will stand in the way of development. But a review of the literature on the economics of inclusionary housing suggests that well-designed programs can generate significant affordable housing resources without overburdening developers or landowners or negatively impacting the pace of development. (4)
The report is obviously addressing two of the most important issues facing us today — the housing affordability challenge that many households face as well as the increasing stratification of communities by income and wealth.
There is a lot of value in the survey of the academic literature on inclusionary housing policies that is provided by this report. At the same time, there is some fuzzy thinking in it too. For instance, the report states that, “As the basic notion of supply and demand suggests, the addition of new units in a given market will inevitably put some downward pressure on the cost of existing units. But the larger effect tends to be upward pressure on housing costs because new homes are primarily built for higher-income residents.” (12)
This analysis ignores the well-accepted concept of filtering in urban economics. Filtering describes the process by which occupants of housing units go from higher-income to lower-income as the unit ages, becomes outdated and is subject to wear and tear. If higher-income households move to the newest housing, then other another household, typically of lower-income, can move into the vacant unit. If the number of households remains constant, then housing prices should decrease as housing development increases.
Because the real world does not look like an economic model, many people think that new housing causes increased housing prices. But the cause of the increased housing prices is often the same thing that is causing new housing construction: increased demand.
Take NYC for instance. In recent years, it issues permits for 10,000-20,000 or so new units of housing a year, but its population has grown by about 60,000 people a year. Combine this with the fact that new housing construction is both a sign and result of gentrification in a particular neighborhood, it is no wonder people think that housing construction pushes prices higher. While this is an understandable line of thought for the man or woman in the street, it is less so for the Lincoln Institute.
My bottom line: this is worth a read, but read with care.
September 30, 2015 | Permalink | No Comments
September 29, 2015
Foreclosed Between a Rock and a Hard Place
Congress has awarded NeighborWorks over $750 million for housing counseling since 2007. NeighborWorks has submitted its most recent quarterly report to Congress on Foreclosure Counseling Successes & Challenges for its National Foreclosure Mitigation Counseling Program. NeighborWorks prepares different reports on outcomes for homeowners while the quarterly reports like this one focus on “successes and challenges of foreclosure mitigation counseling,” as the title of the report suggests. (1) Notwithstanding this limited focus, the report is structured in such a way that it makes me somewhat skeptical of the successes of foreclosure counseling.
The report summarizes the Program’s counseling successes as follows:
Foreclosure rates are waning nationwide; however, the crisis continues to plague many areas of the country in a significant way. Over the course of the NFMC Program, counselors have faced many successes and challenges as they provided foreclosure counseling. Despite many of the challenges counselors faced with foreclosure counseling earlier in the NFMC Program, they have risen to the task by streamlining operations, developing better relationships with servicers, cross-training staff, and expanding counseling services to meet the need of homeowners in crisis. NFMC counselors across the country continue to provide foreclosure mitigation assistance to homeowners with the funds appropriated by Congress. (2)
If you break this down, the successes are:
- counselors have streamlined their own operations
- counselors have developed better relationships with mortgage servicers
- counselors have cross-trained staff
- counselors have expanded their services
Not one of those successes actually talks about achieving efficiencies in the provision of services or improved rates of success for homeowners based on these changes. For instance, I would think that Congress would want to know whether streamlined operations resulted in more homeowners served and more positive outcomes for homeowners achieved. Discussing metrics that are solely internal to the program without any discussion of how those metrics impact the population to be served seems like a step in the wrong direction to me.
That being said, the report highlights the fundamental problems that homeowners in foreclosure face: “counselors for the NFMC Program continue to report that a big challenge is communicating with servicers. Lack of adequate homeowner resources also remains a persistent problem and is a growing challenge for counselors.” (2)
Recalcitrant banks and impoverished homeowners. It sounds like counselors are stuck between a rock a hard place, much like the homeowners themselves.
September 29, 2015 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Round-Up
- The U.S. Department of Housing and Urban Development (HUD) has announced that the Choice Neighborhoods Program (CNP) has selected five cities to receive $150 million to revitalize distressed HUD housing. CNP is a part of the White Houses’ Neighborhood Revitalization Initiative, which seeks to break the cycle of intergenerational poverty through public/private partnerships and broad collaboration to promote healthier neighborhoods. The CNP program specifically seeks to work closely with stakeholders, such as residents; police; and educators, at the local level, to address challenges facing their communities. The goals of the program include: revitalizing housing, improving social mobility and educational outcomes, and encouraging investment in the community. The CNP grants have been made to Atlanta, Georgia; Kansas City, Missouri; Memphis, Tennessee; Milwaukee, Wisconsin and Sacramento, California. All five cities submitted a comprehensive neighborhood revitalization plan to transform an area of concentrated poverty.
September 29, 2015 | Permalink | No Comments
September 28, 2015
Putting Disclosure to the Test
Talia Gillis has posted Putting Disclosure to the Test: Toward Better Evidence-Based Policy to SSRN. This is another one of those papers that seems so esoteric, but really addresses an incredibly important topic in consumer protection. The abstract reads,
Financial disclosures no longer enjoy the immunity from criticism they once had. While disclosures remain the hallmark of numerous areas of regulation, there is increasing skepticism as to whether disclosures are understood by consumers and do in fact improve consumer welfare. Debates on the virtues of disclosures overlook the process by which regulators continue to mandate disclosures. This article fills this gap by analyzing the testing of proposed disclosures, which is an increasingly popular way for regulators to establish the benefits of disclosure. If the testing methodology is misguided then the premise on which disclosures are adopted is flawed, leaving consumers unprotected. This article focuses on two recent major testing efforts: the European Union’s testing of fund disclosure and the Consumer Financial Protection Bureau’s testing of the integrated mortgage disclosures, which will go into effect on August 1, 2015.
Despite the substantial resources invested in these quantitative studies, regulation based on study results is unlikely to benefit consumers since the testing lacks both external and internal validity. The generalizability of the testing is called into question since the isolated conditions of testing overlook the reality of financial transactions. Moreover, the testing method mistakenly assumes a direct link between comprehension and improved decisions, and so erroneously uses comprehension tests.
As disclosure becomes more central to people’s daily lives, from medical decision aids to nutritional labels, greater attention should be given to the testing policies that justify their implementation. This article proposes several ways to improve the content and design of quantitative studies as we enter the era of testing.
One of those clauses bears repeating: “the testing method mistakenly assumes a direct link between comprehension and improved decisions.” I have said repeatedly that the CFPB should rigorously test its financial literacy initiatives because the academic literature does not lend much support to the claim that those initiatives actually help consumers make better financial decisions.
This paper makes a strong case that the CFPB is not paying sufficient attention to the scholarly literature in this area. If so, it may, as a result, lead consumers down a path paved with good intentions that ends at a destination nobody wants to go.
September 28, 2015 | Permalink | No Comments
Monday’s Adjudication Roundup
- Union pension funds have filed a petition for cert in the U.S. Supreme Court to consider whether Bank of New York Mellon Corp. is liable for failure in oversight of 26 trusts of over $30 billion in residential mortgage-backed securities.
- S. Securities and Exchange Commission rejects claims that its in-house court is unconstitutional in suit against Atlanta investment adviser, Timbervest LLC.
- The D.C. Circuit allows reconsideration of HUD’s disparate-impact defense in American Insurance Association case, where the lower court had interpreted the Fair Housing Act to allow suits in which seemingly neutral actions have a discriminatory impact.
September 28, 2015 | Permalink | No Comments
September 25, 2015
CFPB Mortgage Market Rules
Law360 quoted me in Questions Remain Over CFPB Mortgage Rules’ Market Effects (behind a paywall). The story highlights the fact that the jury is still out on exactly what a mature, post-Dodd-Frank mortgage market will look like. As I blogged yesterday, it seems like the new regulatory regime is working, but we need more time to determine whether it is providing the optimal amount of sustainable credit to households of all income-levels. The story opens,
Despite fears that a set of Consumer Financial Protection Bureau mortgage rules that went into effect last year would cut off many black, Hispanic and other borrowers from the mortgage market, a recent government report showed that has not been the case.
Indeed, the numbers from the Federal Financial Institutions Examinations Council’s annual Home Mortgage Disclosure Act annual report showed that the percentage of black and Hispanic borrowers within the overall mortgage market actually ticked up in 2014, even as the percentage of loans those two communities got from government sources went down.
However, it may be too early to say how the CFPB’s ability-to-repay and qualified-mortgage rules are influencing decisions by lenders and potential borrowers as the housing market continues to recover from the 2008 financial crisis, experts say.
“Clearly, there’s a story here, and clearly there’s a story from this 2014 data,” said David Reiss, a professor at Brooklyn Law School. “But I don’t know that it’s that QM and [ability to repay] work.”
The CFPB was tasked with writing rules to reshape the mortgage market and stop the subprime mortgage lending — including no-doc loans and other shoddy underwriting practices — that marked the period running up to the financial crisis.
Those rules included new ability-to-repay standards, governing the types of information lenders would have to collect to have a reasonable certainty that a borrower could repay, and the qualified mortgage standard, a class of mortgages with strict underwriting standards that would be considered the highest quality.
The rules took effect in 2014, after the CFPB made changes aimed at easing lenders’ worries over potential litigation by borrowers should their QMs falter.
Even with those changes, there were worries that black, Hispanic and low-income borrowers could be shut out of the market, as lenders focused only on making loans that met the QM standard or large loans, known as jumbo mortgages, issued primarily to the most affluent borrowers.
According to the HMDA report, that did not happen in the first year the rules were in effect.
Both black and Hispanic borrowers saw a small uptick in the percentage of overall mortgages issued in 2014.
Black borrowers made up 5.2 percent of the overall market in 2014 compared with 4.8 percent in 2013, when lenders were preparing to comply with the rule, and 5.1 percent in 2012, the report said. Latino borrowers made up 7.9 percent of the overall market in 2014 compared with 7.3 percent in 2013 and 7.7 percent in 2012, the federal statistics show.
And the percentage of the loans those borrowers got from government-backed sources like the Federal Housing Administration, a program run by the U.S. Department of Housing and Urban Development targeting first-time and low- to middle-income borrowers, the U.S. Department of Veterans Affairs and other agencies fell.
Overall, 68 percent of the loans issued to black borrowers came with that direct government support in 2014, down from 70.6 percent in 2013 and 77.2 percent in 2012, the HMDA report found. For Hispanic borrowers, 59.5 percent of the mortgages issued in 2014 had direct government support, down from 62.8 percent in 2013 and 70.7 percent in 2012.
For backers of the CFPB’s mortgage rules, those numbers came as a relief.
“We were definitely waiting with bated breath for this,” said Yana Miles, a policy counsel at the Center for Responsible Lending.
To supporters of the rules, the mortgage origination numbers reported by the federal government showed that black and Hispanic borrowers were not being shut out of the mortgage market.
“Not only did we not see lending from those groups go to zero, we’re seeing a very, very small baby step in the right direction,” Miles said. “We’re seeing opposite evidence as to what was predicted.”
And in some ways, the CFPB has written rules that met the goal of promoting safe lending following the poor practices of the housing bubble era while still giving space to lenders to get credit in the market.
“We have a functioning mortgage market,” Reiss said.
September 25, 2015 | Permalink | No Comments
