August 27, 2015
Thursday’s Advocacy & Think Tank Round-Up
- Affordable Rental Housing A.C.T.I.O.N. (A Call to Invest in Our Neighborhooods) has released both a National Fact Sheet and State specific Fact Sheets on the impact of the Low Income Housing Tax Credit Impact (LIHTC), which it characterizes the LIHTC as “the most effective affordable housing production tool.” The National Fact sheet indicates among other things that 2,798,776 units were developed or preserved via the LIHTC. The New York State Fact Sheet, in particular, indicates that 2,357,234 New York households pay more than half of their income in rent (a data point which is included for all states).
- The New York Federal Reserve’s interactive Home Price Index Tool maps overall changes in home prices across localities of the United States as compared to the previous month – the data is current from June 2007 through June 2015.
- The Urban Institute has published, Charted: How Housing Policy Impacts Inequality in which it charted a correlation between housing benefits and income inequality. Their findings indicate that when these benefits go to the well of in the form of the mortgage interest deduction and real estate tax deduction inequality increases. On the other hand, federal housing benefits to the poor decrease inequality.
August 27, 2015 | Permalink | No Comments
August 26, 2015
Principal-ed Reduction
The Urban Institute’s Housing Finance Policy Center has issued a report, Principal Reduction and the GSEs: The Moment for a Big Impact Has Passed. It opens,
The Federal Housing Finance Agency (FHFA) prohibits Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) from unilaterally reducing the principal balance of loans that they guarantee, known as principal reduction. When director Ed DeMarco established the prohibition, he was concerned that reducing principal would cost the GSEs too much, not only in setting up the systems required to implement it, but also— and to him more important — in encouraging borrowers to default in order to receive the benefit. DeMarco’s position generated significant controversy, as advocates viewed principal reduction as a critical tool for reducing borrower distress and pointed out that the program the Obama administration had put forward to provide the relief had largely eliminated the cost to the GSEs, including the moral hazard. We believe that at the time the advocates had the better side of the argument.
The FHFA is now revisiting that prohibition, though in a very different economic environment than the one faced by Director DeMarco. Home prices are up 35.4 percent since the trough in 2011, adding $5 trillion in home equity and reducing the number of underwater homeowners from a peak of 25 percent to 10 percent. This means that far fewer borrowers would likely benefit under a GSE principal reduction program today. (1, footnote omitted)
Principal reduction was highly disfavored at the start of the financial crisis as it was perceived as a sort of giveaway to irresponsible borrowers. Some academics have disputed this characterization, but it probably remains a political reality.
In any event, I think this report has the analysis of the current situation right — the time for principal reduction has passed. But it is worth considering the conditions under which it might be appropriate in the future (for that next crisis, or the one after that). The authors make four assumptions for a politically feasible principal reduction program:
- borrowers must be delinquent at the time the program is announced, in order to avoid the moral hazard of encouraging borrowers to default;
- borrowers must be underwater;
- the house must be owner-occupied; and
- the principal reduction is in the economic interest of Fannie and Freddie.
It is worth noting that during the Great Depression, the federal government figured out ways to reduce the burden of rapidly dropping house prices on lenders and borrowers alike without resorting to principal reduction much. Borrowers benefited from longer repayment terms and lower interest rates. Below-market interest rates are similar to principal reduction because they also reduce monthly costs for borrowers. They are also politically more feasible. It would be great to have a Plan B stored away at the FHFA, the FHA and the VA that outlines a systematic response to a nation-wide drop in housing prices. It could involve principal reduction but it does not need to.
August 26, 2015 | Permalink | No Comments
Wednesday’s Academic Roundup
- The Effect of Economic Growth of a City on Its Neighboring Areas – Evidence from the US, T.M. Tonmoy Islam.
- Realigning Metrics of Economic Well-Being in Residential and Commercial Development Through Sustainable Land Use Planning, Blake Hudson, Washburn Law Journal, Vol. 54, 2015.
- Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods, Eliana Balla, Edward S. Prescott & John R. Walter, FRB Richmond Working Paper No. FEDRWP15-05.
- Consumer Spending and Property Taxes, Paolo Surico & Riccardo Trezzi, FEDS Working Paper No. 2015-057.
- Disparate Impact and the Role of Classification and Motivation in Equal Protection Law after Inclusive Communities, Samuel R. Bagenstos, Cornell Law Review, Vol. 101, Forthcoming.
- The Behaviour of Housing Developers and Aggregate Housing Supply, Jacek Laszek & Krzysztof Olszewski, NBP Working Paper No. 206.
- Boundary Work in Black Middle-Class Communities, Stephen Clowney, 2 Savannah Law Review 225 (2015).
August 26, 2015 | Permalink | No Comments
August 25, 2015
Bank Settlements and the Arc of Justice
MLK Memorial in DC
Martin Luther King, Jr. said that the “arc of the moral universe is long, but it bends towards justice.” A recent report by SNL Financial (available here, but requires a lot of sign-up info) offers us a chance to evaluate that claim in the context of the financial crisis.
SNL reports that the six largest bank holding companies have paid over $132 billion to settle credit crisis and mortgage-related lawsuits brought by governments, investors and other financial institutions.
In the context of the litigation over the Fannie and Freddie conservatorships, I had considered whether it is efficient to respond to financial crises by allowing the government to do what it needs to do during the crisis and then “use litigation to make an accounting to all of the stakeholders once the situation has stabilized.” (121)
Given that the biggest bank settlements are now in the rear view window, we can now say that the accounting for the financial crisis comes in at around $132 billion give or take. Does that number do justice for the wrongs of the boom times? I don’t think I have my own answer to that question yet, but it is certainly worth considering.
On the one hand, we should acknowledge that it is a humongous number, a number so big that that no one would have considered it a likely one at the beginning of the financial crisis. This crisis made nine and ten digit settlement numbers a routine event.
On the other hand, wrongdoing (along with good old-fashioned boom mentality) during the financial crisis almost sent the global economy into a depression. It also wreaked havoc on so many individuals, directly and indirectly.
I look forward to seeing metrics that can make sense of this (ratio of settlement amounts to annual profits of Wall Street firms; ratio to bonus pools; ratio to home equity lost), but I will say that I am struck by the lack of individual accountability that has come out of all of this litigation.
Individuals who made six, seven and eight figure paychecks from this wrongdoing were able to move on relatively unscathed. We should think about how to avoid that result the next time around. Otherwise the arc of justice will bend in the wrong direction.
August 25, 2015 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Round-Up
- The Consumer Financial Protection Bureau (CFPB) has released a series of guides to managing someone else’s money or property in Virginia. There are four separate guides which cover: revocable living trusts, power of attorney, representative payees and fiduciaries, and court appointed conservators.
- The Federal Housing Finance Agency (FHFA) has released its Final Government Sponsored Entity (GSE) Affordable Housing Goals for 2015 – 2017. The Affordable housing goals apply to categories of mortgages including single family purchases, multifamily units with affordable rental units. The goals are expressed in percentages by income level.
- The FHFA has also proposed Amendments to the Stress Testing Rules to implement section 165(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for FHA regulated entities including the GSEs, Fannie Mae and Freddie Mac. The Amendment would change the start of the stress testing cycle and the time frame for the FHFA to provide worst case scenarios by which the regulated entities would conduct testing and report results to the FHFA.
August 25, 2015 | Permalink | No Comments
August 24, 2015
Debt Collection in Flux
Bloomberg BNA Banking Daily quoted me in Loans in Flux as Appeals Court Rebuffs Midland Funding (behind a paywall). It opens,
Lenders, investors and others are watching to see whether the U.S. Supreme Court is the next stop for a case raising questions about how a host of loans are collected, purchased, structured, and priced (Madden v. Midland Funding LLC, 2015 BL 162010, 2d Cir., No. 14-cv-02131, 5/22/15).
At issue is a May ruling by the U.S. Court of Appeals for the Second Circuit that said a debt collector cannot claim protection from state-law claims under the National Bank Act for loans acquired from a national bank (100 BBD, 5/26/15).
The ruling, which jolted banking lawyers who say the decision upsets expectations that assignees may charge and collect interest at rates that were valid at origination, hit with renewed force Aug. 12, when the Second Circuit turned away a petition to rehear the case (156 BBD, 8/13/15).
New questions about the impact of the case arise almost daily, but for many the main question is whether the debt collector, Midland Credit Management, will take the case to the U.S. Supreme Court.
Many expect the company to seek review by the justices. Midland has until early November to do so.
Brooklyn Law School Professor David Reiss isn’t making a prediction, but ticked off a list of factors that might make the difference, including a possible circuit split, questions raised by the case that have “serious doctrinal consequences” for the National Bank Act and other federal statutes, and the potential for friend-of-the-court briefs by the banking industry to grab the justices’ attention.
“While it is a fool’s game to predict confidently which cases will be picked up by the Supreme Court, this case has a bunch of characteristics that make it a contender,” Reiss said Aug. 17.
August 24, 2015 | Permalink | No Comments
