Tag Archives: Congress

Floodproofing Communities

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Gordon Tarpley

NYU’s Furman Center has released a Research Brief, Planning for Resilience: The Challenge of Floodproofing Multifamily Housing. The Brief opens,

As sea levels rise and storms become more frequent and severe due to climate change, many urban areas along the coasts and rivers of the United States are facing a flood-prone future. Especially in the older urban areas along the eastern seaboard, there is a significant stock of multifamily housing that will be increasingly at risk. Much of this housing is out of compliance with federal flood-resistant design and construction standards. Some of these buildings have housing units that are out of compliance because, regardless of their age, they were only recently mapped into the floodplain. And, even buildings that have been in the floodplain for longer may be out of compliance with the rules because their construction predated their jurisdiction’s adoption of the standards. (2)

And it concludes,

As the nation’s floodplains expand, the number and types of housing units at risk of flooding also grows. Multifamily housing makes up a larger share of the at-risk housing in the floodplain than was previously understood, and mitigating the risk to this housing and its residents presents unique challenges that local governments must be prepared to face. While there is no easy answer to how to fund the often costly and disruptive retrofit measures needed in these buildings, there are steps that local governments can take to make it easier for buildings to adapt, such as educating owners about risks, providing them with information about retrofit strategies, and helping them finance improvements. Including strategies like these in a long-term resilience plan will make communities stronger and will ensure that multifamily buildings and their residents are not left behind as flood-prone areas adapt. (10)

There is no doubt that this is right. New York City under both Mayors Bloomberg and De Blasio have taken this issue very seriously, but a lot of work remains to be done. And the odds are that the amount of work will only increase with time as sea levels rise higher and higher. Because many other local governments do not have the resources of NYC, they will get their wake up calls the hard way.

Given the broad effects of climate change, resiliency efforts would ideally be led by the federal government. But I don’t see that happening for a long time, probably after an avoidable tragedy on a large scale spurs Congress to action, notwithstanding its ideological commitments.

Thursday’s Advocacy & Think Tank Round-Up

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  • Enterprise Community Partners and other leaders of the #Capshurtcommunities campaign have arranged a National Call in days on September 15 and 16, 2015 to “to educate Members of Congress on just how devastating these cuts are to low-income children, families, seniors, and veterans in our communities.”  The #Capshurtcommunities campaign’s goals are to “Realign the federal budget to preserve and expand access to affordable rental housing for low income households while continuing support for homeownership opportunities for low and moderate income families.”  According to the campaign’s leaders the low spending caps which Congress has placed on Federal housing programs hamper the U.S.’s ability to meet its diversity, educational and economic mobility potentials.

Thursday’s Advocacy & Think-Tank Round-Up

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  • Enterprise Community Partner’s and other affordable housing advocates have launched #CapsHurtCommunities, a campaign to raise spending caps imposed and restore critical funding. They are urging organizations and concerned citizens to reach out to Congress while the members on recess – asking them to support tax extenders legislation and fully fund affordable housing. The Summer Advocacy Tool Kit contains a variety ideas for creating awareness around the issue.
  • The Make Room Campaign’s mission is to raise awareness around the rent affordability crisis currently being played out in homes across the U.S. The Campaign has a novel approach – celebrity concerts, held on the 1st, (when the rent is due) in rent burdened living rooms.  In July, Grammy Award winning Artist Timothy Bloom held a concert in the Paterson NJ (See, NJ Factsheet) home of the five member Montgomery family, which spends more than half its income on rent and despite holding three jobs, is behind on bills and cannot afford a vehicle. Last Month’s concert was in the Los Angeles, CA (See, CA Factsheet) home of the Duartes where Carly Rae Jepson performed her hit song, “Call Me Maybe.”
  • National Association of Realtors’ Pending Home Sales Index took a dip in June, after five months of increases. on the other hand, when compared to June of 2014, it reflects an 8.2% increase.

The Importance of Understanding G-Fees

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The Federal Housing Finance Agency has released Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2014. Ok, ok, this is some really technical stuff. But it gives us a lot of important information about what goes into the cost of a home mortgage.

The executive summary opens, “The Housing and Economic Recovery Act of 2008 (HERA) requires the Federal Housing Finance Agency (FHFA) to submit reports to Congress annually on the guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises).” (2, footnotes omitted) The report finds that “the average level of guarantee fees charged has increased since 2009. The guarantee fees are currently two-and-a-half times their previous level; from 2009 to 2014, average fees increased from 22 basis points to 58 basis points. From 2013 to 2014, average fees increased from 51 basis points to 58 basis points.” (2, footnote omitted)

For all of you non-experts out there, a basis point is 1/100th of a percentage point. So a guarantee fee (or g-fee in the lingo) of 58 basis points increases the interest rate paid by more than half a percentage point (for instance, from 4.5% to 5.08%).  So homeowners should want to understand why g-fees have more than doubled since 2009.

The report breaks down how g-fees gradually increased in response to Congressional and FHFA requirements, some of which are not tied to housing finance goals at all. For instance, Congress added ten basis points to fund an extension of a tax cut.

Many have argued that g-fees should be kept as low as possible in order to help out the housing market. I do not take that position, in large part because cheap credit does not necessarily lower the cost of housing; sellers may just be able to raise the price of their homes in a cheap credit environment. I also believe that the housing market and the mortgage market need to achieve some sort of equilibrium and unnaturally low g-fees will distort such an equilibrium.

The price of the g-fee should reflect the real costs of the g-fee. For instance, it should cover the cost of losses that result from borrower default. It should not be used to fund programs unrelated to housing. G-fees that are unnaturally high distort the housing finance market and make homeowners subsidize other constituencies. Federal housing finance policy tends to get screwed up if it veers too much from its fundamentals, so we should not ask too much of the g-fee.

Fannie and Freddie have been in limbo ever since they entered conservatorship in 2008. The longer they are in that limbo, the more likely it is that Congress will use them to do all sorts of things that do not relate to maintaining a liquid housing finance market. This study outlines how the g-fee has morphed over time and is a wake-up call to homeowners and policy makers alike to set Fannie and Freddie on a healthy course for the long term, starting with that obscure and technical g-fee.

High Risk at Fannie and Freddie

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FHFA Director Watt

The Federal Housing Finance Agency released its 2014 Report to Congress. It summarizes many interim reports and press releases that were released over the previous year, many of which have been covered by REFinBlog as they came out. I was struck, however, by the passages about the operational risk that Fannie and Freddie face.  I have been concerned with operational risk at Fannie and Freddie for some time, as the two enterprises have languished in conservatorship limbo for far too long.

The Report of the Annual Examination of Fannie Mae states that

The level of operational risk remains high and largely reflects the risk posed by execution of Fannie Mae’s strategic plan to replace its existing information technology infrastructure. Management has made significant progress in stabilizing the current information technology environment, with improvements in the change management process and reductions in production outages. Further, progress was made in establishing an out-of-region data center that is a critical component for supporting information systems and providing for business continuity in the event of a disaster. As Fannie Mae implements this plan, however, the level of operational risk will remain elevated. Risks associated with the execution, deployment, and integration with the CSP [Common Securitization Platform] and the move to a Single Security, while addressing ongoing IT infrastructure issues, will also introduce a significant level of inherent operational risk to the organization. Effective project management will be critical to mitigate the operational risk arising from these efforts.(14, emphasis added)

The Report of the Annual Examination of Freddie Mac indicates that Freddie faces somewhat different operational risks:

Operational risk, including risks associated with information technology systems, remains a concern primarily because of resource requirements and operational complexities of major strategic initiatives (including integration with the CSP), developing information security and privacy protection capabilities, and heightened risk during the transition to the new risk management structure.

Information security is one of the primary operational risks Freddie Mac faces given the proliferation of cyber crimes and the high probability of new cyber attacks targeted at large organizations. Freddie Mac’s operational framework is highly complex. Information security within the Enterprise is more important than ever given the pervasiveness of cyber-related threats. In addition to external threats, Freddie Mac faces other challenges that may continue to elevate operational risk and increase the likelihood of significant operational incidents and losses. (17, emphasis added)

While neither of these passages is terrifying — as in, here-is-the-next-trigger-for-a-bailout terrifying — they do make me pause and ask whether the GSEs in their current form are up to the challenge of handling this period of “heightened risk.”

Those in Congress who are impeding GSE reform are on notice that Fannie and Freddie face high levels of operational risk. If the next crisis results from that risk, it is on them.

Reiss on EB-5 Green Card Reform

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Ellis Island

GlobeSt.com quoted me in Congress Moves to Revamp EB-5. It reads in part,

Last week Senate Judiciary Committee Chairman Chuck Grassley and ranking member Senator Patrick Leahy introduced bipartisan legislation to reauthorize and reform the EB-5 Regional Center program.

This did not come as a surprise to the commercial real estate industry, which has been watching the approaching Sept. 30, 2015 deadline with a mixture of dread and anticipation.

Simply put, the program has become an increasingly popular funding source for projects, David Cohen, a shareholder at Brownstein Hyatt Farber Schreck in Washington DC, tells GlobeSt.com.

“As the popularity of the EB-5 program has grown in the last few years, so too has the scope of the deals its being used to fund,” he says. “There is far more money at stake than there was even a few years ago.”

The changes proposed in the bill — officially called the American Job Creation and Investment Promotion Reform Act — touched upon some of the more controversial parts of the program. It proposes strengthening oversight by Department of Homeland Security and Securities and Exchange Commission oversight and putting in place measures that would discourage fraud. Overall, national security would have a greater focus this time around.

*     *     *

The EB-5 program “has a very interesting mix of policy goals, including immigration, community development and employment ones,” says David Reiss, a law professor at Brooklyn Law School and research director of the Center for Urban Business Entrepreneurship (CUBE).

It also has a great deal of flexibility – and many say too much flexibility, he continues. “For instance, companies have been able to characterize hot locations in Brooklyn and Manhattan as areas of high unemployment by defining the targeted employment area expansively,” he tells GlobeSt.com.

“For instance, the biggest real estate project in Brooklyn, Pacific Park — formerly known as Atlantic Yards –used nearby neighborhoods with high unemployment for an EB-5 investment located in a relatively low unemployment area,” he says.

In short, “there is a lot of talk of reform of the program that comes from all different directions – raise the minimum investment amount! – ensure that the targeted employment area is more narrowly drawn! – establish national standards!” Reiss says.

“But it is too early to tell which reforms might stick.”

Frannie Conservatorships: What A Long, Strange Trip It’s Been

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The Federal Housing Finance Agency Office of Inspector General has posted a White Paper, FHFA’s Conservatorships of Fannie Mae and Freddie Mac: A Long and Complicated Journey. This White Paper on conservatorships updates a first one that OIG published in 2012. This one notes that over the past six years,

FHFA has administered two conservatorships of unprecedented scope and simultaneously served as the regulator for these large, complex companies that dominate the secondary mortgage market and the mortgage securitization sector of the U.S. housing finance industry. Congress granted FHFA sweeping conservatorship authority over the Enterprises. For example, as conservator, FHFA can exercise decision-making authority over the Enterprises’ multi-trillion dollar books of business; it can direct the Enterprises to increase the fees they charge to guarantee mortgage-backed securities; it can mandate changes to the Enterprises’ credit underwriting and servicing standards for single-family and multifamily mortgage products; and it can set policy governing the disposition of the Enterprises’ inventory of approximately 121,000 real estate owned properties. (2)

I was particularly interested by the foreward looking statements contained in this White Paper:

Director Watt has repeatedly asserted that conservatorship “cannot and should not be a permanent state” for the Enterprises. Director Watt has indicated that under his stewardship FHFA will continue the conservatorships and build a bridge to a new housing finance system, whenever that system is put into place by Congress. In this phase of the conservatorships, FHFA seeks to place more decision-making in the hands of the Enterprises. (3)

Those who have been hoping that the FHFA will act decisively in the face of Congressional inaction should let that dream go. And given that just about nobody believes (I still hope though) that there will be Congressional reform of Fannie and Freddie during the remainder of the Obama Administration, we must face the reality that we are stuck with the conservatorships and all of the risks that they foster for the foreseeable future. Today’s risks include historically high rates of mortgage delinquencies and exposure to defaults by counterparties like private mortgage insurers. As I have said before, the risks that Fannie and Freddie are nothing to laugh at. Let’s hope that the FHFA is up to managing them until Congress finally acts.