Tag Archives: affordability

The Future of Mortgage Default

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photo by Diane BassfordThe Consumer Financial Protection Bureau has shared its Principles for the Future of Loss Mitigation. It opens,

This document outlines four principles, Accessibility, Affordability, Sustainability, and Transparency, that provide a framework for discussion about the future of loss mitigation as the nation moves beyond the housing and economic crisis that began in 2007. As the U.S. Department of Treasury’s Home Affordable Modification Program (HAMP) is phased out, the Consumer Financial Protection Bureau (CFPB) is considering the lessons learned from HAMP while looking forward to the continuing loss mitigation needs of consumers in a post-HAMP world. These principles build on, but are distinct from, the backdrop of the Bureau’s mortgage servicing rules and its supervisory and enforcement authority. This document does not establish binding legal requirements. These principles are intended to complement ongoing discussions among industry, consumer groups and policymakers on the development of loss mitigation programs that span the full spectrum of both home retention options such as forbearance, repayment plans and modifications, and home disposition options such as short sales and deeds-in-lieu.

The future environment of mortgage default is expected to look very different than it did during the crisis. Underwriting based on the ability to repay rule is already resulting in fewer defaults. Mortgage investors have recognized the value of resolving delinquencies early when defaults do occur. Mortgage servicers have developed systems and processes for working with borrowers in default. The CFPB’s mortgage servicing rules have established clear guardrails for early intervention, dual tracking, and customer communication; however, they do not require loss mitigation options beyond those offered by the investor nor do they define every element of loss mitigation execution.

Yet, even with an improved horizon and regulatory guardrails, there is ample opportunity for consumer harm if loss mitigation programs evolve without incorporating key learnings from the crisis. While there is broad agreement within the industry on the high level principles, determining how they translate into programs is more nuanced. Further development of these principles and their implementation is necessary to prevent less desirable consumer outcomes and to ensure the continuance of appropriate consumer protections.

The CFPB concludes,

The CFPB believes these principles are flexible enough to encompass a range of approaches to loss mitigation, recognizing the legitimate interests of consumers, investors and servicers. One of the lessons of HAMP is that loss mitigation that is good for consumers is usually good for investors, as well. The CFPB therefore seeks to engage all stakeholders in a discussion of the principles for future loss mitigation.

I have no beef with this set of principles as far as it goes, but I am concerned that it does not explicitly include a discussion of the role of state court foreclosures in loss mitigation. As this blog has well documented, homeowners are facing Kafkaesque, outrageous, even hellish, behavior by servicers in state foreclosure actions. Even if the federal government cannot address state law issues directly, these issues should be included as part of the discussion of the problems that homeowners face when their mortgages go into default.

Does Housing Finance Reform Still Matter?

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Ed DeMarco and Michael Bright

Ed DeMarco and Michael Bright

The Milken Institute’s Michael Bright and Ed DeMarco have posted a white paper, Why Housing Reform Still Matters. Bright was the principal author of the Corker-Warner Fannie/Freddie reform bill and DeMarco is the former Acting Director of the Federal Housing Finance Agency. In short, they know housing finance. They write,

The 2008 financial crisis left a lot of challenges in its wake. The events of that year led to years of stagnant growth, a painful process of global deleveraging, and the emergence of new banking regulatory regimes across the globe.

But at the epicenter of the crisis was the American housing market. And while America’s housing finance system was fundamental to the financial crisis and the Great Recession, reform efforts have not altered America’s mortgage market structure or housing access paradigms in a material way.

This work must get done. Eventually, legislators will have to resolve their differences to chart a modernized course for housing in our country. Reflecting upon the progress made and the failures endured in this effort since 2008, we have set ourselves to the task of outlining a framework meant to advance the public debate and help lawmakers create an achievable plan. Through a series of upcoming papers, our goal will be to not just foster debate but to push that debate toward resolution.

Before setting forth solutions, however, it is important to frame the issues and state why we should do this in the first place. In light of the growing chorus urging surrender and going back to the failed model of the past, our objective in this paper is to remind policymakers why housing finance reform is needed and help distinguish aspects of the current system that are worth preserving from those that should be scrapped. (1)

I agree with a lot of what they have to say.  First, we should not go back to “the failed model of the past,” and it amazes me that that idea has any traction at all. I guess political memories are as short as people say they are.

Second, “until Congress acts, the FHFA is stuck in its role of regulator and conservator.” (3) They argue that it is wrong to allow one individual, the FHFA Director, to dramatically reform the housing finance system on his own. This is true, even if he is doing a pretty good job, as current Director Watt is.

Third, I agree that any reform plan must ensure that the mortgage-backed securities market remain liquid; credit remains available in all submarkets markets; competition is beneficial in the secondary mortgage market.

Finally, I agree with many of the goals of their reform agenda: reducing the likelihood of taxpayer bailouts of private actors; finding a consensus on access to credit; increasing the role of private capital in the mortgage market; increasing transparency in order to decrease rent-seeking behavior by market actors; and aligning incentives throughout the mortgage markets.

So where is my criticism? I think it is just that the paper is at such a high level of generality that it is hard to find much to disagree about.  Who wouldn’t want a consensus on housing affordability and access to credit? But isn’t it more likely that Democrats and Republicans will be very far apart on this issue no matter how long they discuss it?

The authors promise that a detailed proposal is forthcoming, so my criticism may soon be moot. But I fear that Congress is no closer to finding common ground on housing finance reform than they have been for the better part of the last decade. The authors’ optimism that consensus can be reached is not yet warranted, I think. Housing reform may not matter because the FHFA may just implement a new regime before Congress gets it act together.

New Housing and Displacement

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The Institute of Governmental Studies at UC Berkeley has issued a research brief, Housing Production, Filtering and Displacement: Untangling the Relationships. It opens,

Debate over the relative importance of subsidized and market-rate housing production in alleviating the current housing crisis continues to preoccupy policymakers, developers, and advocates. This research brief adds to the discussion by providing a nuanced analysis of the relationship between housing production, affordability, and displacement in the San Francisco Bay Area, finding that:

• At the regional level, both market-rate and subsidized housing reduce displacement pressures, but subsidized housing has over double the impact of market-rate units.

• Market-rate production is associated with higher housing cost burden for low-income households, but lower median rents in subsequent decades.

• At the local, block group level in San Francisco, neither market-rate nor subsidized housing production has the protective power they do at the regional scale, likely due to the extreme mismatch between demand and supply.

Although more detailed analysis is needed to clarify the complex relationship between development, affordability, and displacement at the local scale, this research implies the importance of not only increasing production of subsidized and market-rate housing in California’s coastal communities, but also investing in the preservation of housing affordability and stabilizing vulnerable communities. (1)

This brief takes on an important subject — the relationship between new housing and displacement — and concludes,

There is no denying the desperate need for housing in California’s coastal communities and similar housing markets around the U.S. Yet, while places like the Bay Area are suffering from ballooning housing prices that are affecting people at all income levels, the development of market-rate housing may not be the most effective tool to prevent the displacement of low-income residents from their neighborhoods, nor to increase affordability at the neighborhood scale.

Through our analysis, we found that both market-rate and subsidized housing development can reduce displacement pressures, but subsidized housing is twice as effective as market-rate development at the regional level. It is unclear, however, if subsidized housing production can have a protective effect on the neighborhood even for those not fortunate enough to live in the subsidized units themselves.

By looking at data from the region and drilling down to local case studies, we also see that the housing market dynamics and their impact on displacement operate differently at these different scales. Further research and more detailed data would be needed to better understand the mechanisms via which housing production affects neighborhood affordability and displacement pressures. We know that other neighborhood amenities such as parks, schools, and transit have a significant impact on housing demand and neighborhood change and it will take additional research to better untangle the various processes at the local level.

In overheated markets like San Francisco, addressing the displacement crisis will require aggressive preservation strategies in addition to the development of subsidized and market-rate housing, as building alone won’t protect specific vulnerable neighborhoods and households. This does not mean that we should not continue and even accelerate building. However, to help stabilize existing communities we need to look beyond housing development alone to strategies that protect tenants and help them stay in their homes. (10-11, footnote omitted)

The brief struggles with a paradox of housing — how come rents keep going up in neighborhoods with lots of new construction? The answer appears to be that the broad regional demand for housing in a market like the Bay Area or New York City overwhelms the local increase in housing supply. The new housing, then, just acts like a signal of gentrification in the neighborhoods in which it is located.

If I were to criticize this brief, I would say that it muddies the waters a bit as to what we need in hot markets like SF and NYC: first and foremost, far more housing units. In the absence of a major increase in supply, there will be intense market pressure to increase rents or convert units to condominiums. Local governments will have a really hard time overcoming that pressure and may just watch as area median income rises along with rents. New housing may not resolve the problem of large-scale displacement, but it will be hard to address displacement without it. Preservation policies should be pursued as well, but the only long-term solution is a lot more housing.

I would also say that the brief elides over the cost of building subsidized housing when it argues that subsidized housing has twice the impact of market-rate units on displacement. The question remains — at what cost? Subsidized housing is extremely expensive, often costing six figures per unit for new housing construction. The brief does not tackle the question of how many government dollars are needed to stop the displacement of one low-income household.

My bottom line: this brief begins to untangle the relationship between housing production and displacement, but there is more work to be done on this topic.

The Single-Family Rental Revolution Continues

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The Kroll Bond Rating Agency has released its Single-Borrower SFR: Comprehensive Surveillance Report:

Kroll Bond Rating Agency (KBRA) recently completed a comprehensive surveillance review of its rated universe of 23 single-borrower, single-family rental (SFR) securitizations. In connection with these transactions, 132 ratings are outstanding, all of which have been affirmed. The transactions have an aggregate outstanding principal balance of $13.0 billion, of which $12.6 billion is rated. These transactions have been issued by six sponsors, which own approximately 159,700 properties, 90,649 of which are included in the securitizations that are covered in this report. (3)

This business model took off during the depths of the Great Recession when capital-rich companies were able to buy up single-family homes on the cheap and in bulk. While the Kroll report is geared toward the interests of investors, it contains much of interest for those interested in housing policy more generally. I found two highlights to be particularly interesting:

  • The 90,649 properties underlying the subject transactions have, on average, appreciated in value by 10.2% since the issuance dates of the respective transactions . . . (4)
  • The underlying collateral has exhibited positive operating performance with the exception of expenses. Contractual rental rates have continued to increase, vacancy rates declined (but remain above issuance levels), tenant retention rates have remained relatively stable, and delinquency rates have remained low. (Id.)

KBRA’s overall sector outlook for deal performance is

positive given current rental rates, which have risen since institutional investors entered the SFR space, although the rate of increase has slowed. Future demand for single-family rental housing will be driven by the affordability of rents relative to home ownership costs as well as the availability of mortgage financing. In addition, homeownership rates are expected to continue to decline due to changing demographics. Recent data released by the Urban Institute shows the percentage of renters as a share of all households growing from 35% as of the 2010 US Decennial Census to 37% in 2020 and increasing to 39% by 2030. Furthermore, 59% of new household formations are expected to be renters. Against this backdrop, KBRA believes single-borrower SFR securitizations have limited term default risk. However, there has been limited seasoning across the sector, and no refinancing has occurred to date. As such, these transactions remain more exposed to refinance risk. (9)

Kroll concludes that things look good for players in this sector. It does seem that large companies have figured out how to make money notwithstanding the higher operating costs for single-family rentals compared to geographically concentrated multifamily units.

I am not sure what this all means for households themselves. Given long-term homeownership trends, it may very well be good for households to have another rental option out there, one that makes new housing stock available to them. Or it might mean that households will face more competition when shopping for a home. Both things are probably true, although not necessarily both for any particular household.

The Rental Crisis and Household Formation

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The Mortgage Bankers Association has posted a Special Report: Diverted Homeowners, the Rental Crisis and Foregone Household Formation. The report’s bottom line is that people who should have been homeowners have displaced people who should have been renters. Those displaced people have been left in their original households, typically those headed by their parents.

The Report’s Executive Summary states that among the long term impacts of the Great Recession

have been the emergence of a rental housing shortage and an intensified affordability crisis in the rental market. In this report, we analyze various supply and demand factors that have led to this crisis.

In so doing, we provide detailed analysis of the shifts in homeowner and rental demand. As we note, these shifts cannot be analyzed without understanding the shifts in household formation that have occurred. We utilize data from the U.S. Census and focus the analysis on 3 distinct time periods (2000, 2006, 2012) to highlight housing epochs that are relatively normal, at the peak, and near the bottom of the market. Special attention is also placed on those younger than age 45 because they represent the households most commonly making first time decisions to form a household and to own a house.

Our primary findings:

• A sharp downturn in homeowner growth since 2006 suggests that 6.0 million would-be homeowners (the expected number compared to actual) have been shifted to renting or have left the housing market.

• These diverted homeowners triggered a cascade of adjustments throughout the rental housing sector that are measurable in different ways.

• A sizable portion (roughly a third) of the diverted homeowners likely have been absorbed into single-family rentals, especially among households aged 25 to 54.

• Although larger than expected, growth in the rental sector was too small to account for both the expected rental growth and also the large number of diverted homeowners. Before disruptions to the owner-occupied market, the rental sector had been expected to grow by 4.4 million occupied units after 2006, due to the arrival of the large Millennial generation. While diverted homeowners resulted in demand for nearly 6 million additional rental units, rental housing only grew by 5.2 million.

• New construction was crippled during the financial crisis and aftermath, slowing its response to the swelling rental demand, although multifamily construction volume nearly doubled in 2012 compared to 2010, and increased another third in 2014 compared to 2012.

• The clear inference is that slightly more than 5 million otherwise-expected renters left or never entered the housing market, their growth displaced by the diverted homeowners, and diminishing overall household growth far below expectations. (1)

• A further consequence of the resulting increase in demand and shortfall in supply in the rental market was an increase in rents, with rental affordability problems surging to record heights in 2010 and 2012. This dynamic created an increased incidence of high rental cost burdens that was remarkable for its relative uniformity across the nation.

There has been a fair amount written recently about household formation (here and here, for instance), but this Report is notable for its description of the cascading effect that the financial crisis has had on today’s housing market. We are around the fifty-year low for the homeownership rate.  If that rate has hit bottom, perhaps the trends identified in the MBA report are about to reverse course.

The Land Use Report of the President

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The Economic Report of the President contains an important analysis of local land use policies in a section titled “Constraints on Housing Supply:”

Supply constraints provide a structural challenge in the housing market, particularly in high-mobility, economically vibrant cities. When housing supply is constrained, it has less room to expand when demand increases, leading to higher prices and lower affordability. Limits on new construction can, in turn, impede growth in local labor markets and restrain aggregate output growth. Some constraints on the supply of housing come from geography, while others are man-made. Constraints due to land-use regulations, such as minimum lot size requirements, height restrictions, and ordinances prohibiting multifamily housing, fall into the man-made category and thus could be amended to support more inclusive growth. While these regulations can sometimes serve legitimate purposes such as the protection of human health and safety and the prevention of environmental degradation, land-use regulations can also be used to protect vested interests in housing markets.

Gyourko and Molloy (2015) argue that supply constraints have worsened in recent decades, in large part due to more restrictive land-use regulations. House prices have risen faster than construction costs in real terms, providing indirect evidence that land-use regulations are pushing up the price of land.

According to Gyourko and Molloy (2015), between 2010 and 2013, real house prices were 55 percent above real construction costs, compared with an average gap of 39 percent during the 1990s. Several other studies note that land-use regulations have been increasing since roughly 1970, driving much of the real house appreciation that has occurred over this time (Glaeser, Gyourko, and Saks 2005; Glaeser and Ward 2009; Been et al. 2014). This pattern is noteworthy because of the positive correlation between cities’ housing affordability and the strictness of their land use regulations, as measured by the Wharton Residential Land Use Regulation Index (Gyourko et al. 2008). Cities to the lower right of the figure which include Boston and San Francisco, have stringent land-use regulations and low affordability. Cities at the upper left, which include St. Louis and Cleveland, have low regulation and high affordability. Supply constraints by themselves do not make cities low in affordability. Rather, the less responsive housing supply that results from regulation prevents these cities, which often happen to be desirable migration destinations for workers looking for higher-paying jobs, from accommodating a rise in housing demand.

In addition to housing affordability, these regulations have a range of impacts on the economy, more broadly. Reduced housing affordability—whether as an ancillary result of regulation or by design—prevents individuals from moving to high productivity areas. Indeed, empirical evidence from Molloy, Smith, and Wozniak (2012) indicates that migration across all distances in the United States has been in decline since the middle of the 1980s. This decreased labor market mobility has important implications for intergenerational economic mobility (Chetty et al. 2014) and also was estimated in recent research to have held back current GDP by almost 10 percent (Hsieh and Moretti 2015).

Land-use regulations may also make it more difficult for the housing market to accommodate shifts in preferences due to changing demographics, such as increased demand for modifications of existing structures due to aging and increased demand for multifamily housing due to higher levels of urbanization (Goodman et al. 2015). A number of Administration initiatives, ranging from the Multifamily Risk-Sharing Mortgage program to the Affirmatively Furthering Fair Housing rule, try to facilitate the ability of housing supply to respond to housing demand. Ensuring that zoning and other constraints do not prevent housing supply from growing in high productivity areas will be an important objective of Federal as well as State and local policymakers. (87-89, figures omitted and emphasis added)

It is important in itself that the Executive Branch of the federal government has acknowledged the outsized role that local land use policies play in the economy. But the policies that the Obama Administration has implemented don’t go very far in addressing the problems caused by myopic land use policies that favor vested interests. The federal government can be far more aggressive in rewarding local land use policies that support equitable housing and economic development goals. It can also punish local land use policies that hinder those goals.

Edward Glaeser and Joseph Gyourko get much of the credit for demonstrating the effect that local land use policies have on federal housing policy. Now that the President is listening to them, we need Congress to pay attention too. This could be one of those rare policy areas where Democrats and  Republicans can find common ground.

What Makes NYC Crowded

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"Manhattan from Weehawken, NJ" by Dmitry Avdeev

NewsDocVoices quoted me in What Makes NYC Become More and More Crowded. It reads, in part,

Yuqiao Cen, a graduate engineering student at NYU, makes sure to shower before 10pm every night, otherwise she is criticized for making too much noise in her apartment. She lives with her landlord and his family of five in a 3-bedroom apartment on 11th Avenue in Brooklyn.

Similar to Cen, Yanjun Wu, a newly admitted graduate student at Fordham University, barely stays in his living room because she feels uneasy wearing pajamas while her male roommates are around. She lives with 4 roommates in a 4-bedroom apartment on the Upper West Side.

Cen and Wu are not the only ones forced to share an apartment. Many of their classmates and friends living in New York are also doing the same thing. In fact, a recent study conducted by the New York City Comptroller Office suggested that NYC has become much more crowded in the past 10 years with the crowding rate being more than two and a half times the national average.

The study “Hidden Households” was conducted by Scott Stringer, New York City Comptroller, highlighting the growing crowding rate in housing in NYC. According to the study, New York City’s crowding rate has rose from 7.6 percent in 2005 to 8.8 percent in 2013. The number of crowded housing units grew from 228,925 in 2005 to 272,533 in 2013, representing an increase of 19 percent.

The increase in the crowding rate is city-wide. The Comptroller’s study indicates that the proportion of crowded dwelling units increased in all of the five boroughs except Staten Island during this time period. Brooklyn has the largest increase with 28.1 percent, Queens has 12.5 percent and 12.3 percent in the Bronx.

*     *     *

“Fundamentally, this is a story about supply and demand,” said David Reiss, professor of Law in Brooklyn Law School, and research director of Center for Urban Business Entrepreneurship. “The increase of the housing supply has been very slow, while the increase of the population was very fast, and that is the recipe for crowding. Because people can’t afford to live where they want to live, their choices would be continuing to live where they want to live and be crowded, or to switch to location with more space for your dollar.”

The data confirm Reiss’s observation. According to the U.S. Census Bureau, NYC’s population in 2013 was 8.43 million, increasing from t8.2 million in 2005. However, the 2014 Housing Supply Report, conducted by New York City Rent Guidelines Board, also indicates that the number of permits issued for new construction of residential units had reached its peak – 34,000 in 2008, but the number decreased greatly to 6,000 in 2009. Although the number kept gradually going up, and reached to 18,000 in 2013, the market is no longer as hot as before the financial crisis of 2008.

Contrary to common belief, income does not in itself drive crowding. Although “Hidden Households” shows that 23.6 percent of crowded households reported household incomes in the City’s bottom quartile, it also revealed that 18.5 percent of crowded households have incomes in the City’s top quartile and 5.2 percent of crowded households have incomes in the 90th percentile or higher.

In the beginning of apartment hunting, Wu and her roommates wanted to rent a five-bedroom apartment so that everyone could have their own private space. “The market is too busy in New York,” said Wu. “Once we were going to pay the [lease] for an apartment on Roosevelt Island, but someone was ahead of us by just a few minutes.”

After weeks of apartment hunting, Wu and her roommates decided to make a compromise – two of them would have to share a bedroom, in order to get a decent apartment at an acceptable price – $4,900 per month, with neither an elevator nor a laundry room.

“Land is very expensive, and there is not much left for residential development but a tremendous number of people want to live in New York,” said Albert Goldson, Executive Director of Indo-Brazilian Associates LLC, A NYC-based global advisory firm. “Real estate prices started to go up, so you have people who are middle class or who have modest salaries who can no longer afford [to pay a] mortgage. And what many of them would have done, either single people or a family, was ‘double up’. Like single people who bring in a roommate, now have several roommates in a unit.”

Most experts in the urban planning industry believe that the underlying cause of the growing crowding rate is the affordability of housing. Goldson argues that the city needs to be more available for middle-class people who are actually working here and potentially leaving the city if it is too small or uncomfortable to live here anymore.

From Reiss’ perspective, the way to solve affordability of housing is to amend its zoning code to encourage the construction of housing. Vertical construction is a trend and a solution to the crowding situation. But in the meantime, with more people living in taller buildings, the density would definitely increase. “If the city is really committed to increasing the affordability of housing, you have to be committed to increase the housing density as well,” said Reiss.