Tag Archives: foreclosures

A Shortage of Short Sales

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Calvin Zhang of the Federal Reserve Bank of Philadelphia has posted A Shortage of Short Sales: Explaining the Under-Utilization of a Foreclosure Alternative to SSRN. The abstract reads,

The Great Recession led to widespread mortgage defaults, with borrowers resorting to both foreclosures and short sales to resolve their defaults. I first quantify the economic impact of foreclosures relative to short sales by comparing the home price implications of both. After accounting for omitted variable bias, I find that homes selling as a short sale transact at 8.5% higher prices on average than those that sell after foreclosure. Short sales also exert smaller negative externalities than foreclosures, with one short sale decreasing nearby property values by one percentage point less than a foreclosure. So why weren’t short sales more prevalent? These home-price benefits did not increase the prevalence of short sales because free rents during foreclosures caused more borrowers to select foreclosures, even though higher advances led servicers to prefer more short sales. In states with longer foreclosure timelines, the benefits from foreclosures increased for borrowers, so short sales were less utilized. I find that one standard deviation increase in the average length of the foreclosure process decreased the short sale share by 0.35-0.45 standard deviation. My results suggest that policies that increase the relative attractiveness of short sales could help stabilize distressed housing markets.

The paper highlights the importance of aligning incentives in the mortgage market among lenders, investors, servicers and borrowers. Zhang makes this clear in his conclusion:

While these individual results seem small in magnitude, the total economic impact is big because of how large the real estate market is. A back-of-the-envelope calculation suggests that having 5% more short sales than foreclosures would have saved up to $5.8 billion in housing wealth between 2007 and 2011. Thus, there needs to be more incentives for short sales to be done. The government and GSEs already began encouraging short sales by offering programs like HAFA [Home Affordable Foreclosure Alternatives] starting in 2009 to increase the benefits of short sales for both the borrower and the servicer, but more could be done such as decreasing foreclosure timelines. If we can continue to increase the incentives to do short sales so that they become more popular than foreclosures, future housing downturns may not be as extreme or last as long. (29)

Evidence and Innovation in Housing

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Lee Anne Fennell and Benjamin Keys have posted the Introduction to their new book, Evidence and Innovation in Housing Law and Policy, to SSRN. It opens,

No area of law and policy presents more important and pressing questions, or ones more central to human well-being, than that of housing. Yet academic discourse around housing is too often siloed into separate topical areas and disciplinary approaches, while remaining distanced from the contentious housing policy debates unfolding in communities across the nation. In June 2016, the Kreisman Initiative on Housing Law and Policy at the University of Chicago Law School convened a conference in downtown Chicago with the goal of breaking down these barriers and forging new connections – between different facets of housing law and policy, between different disciplinary approaches to housing issues, between academic inquiry and applied policy, and between the lessons of the past and adaptations for the future.

This volume is the product of that conference and the dialogue it provoked among academics, practitioners, and policy makers. Its baker’s dozen of contributions comprises cutting-edge interdisciplinary work on housing and housing finance from leading scholars in law, economics, and policy. The pieces individually and collectively showcase how research and policy can come together in the housing arena. We hope the end result will have lasting relevance in setting the course – and identifying the obstacles – for housing law and policy going forward.

This book is organized around two interlocking roles that housing serves: as a vehicle for building community, and as a vehicle for building wealth. These facets of housing carry implications both for the households who consume residential services and for the larger economic, political, and spatial domains in which housing plays such a primary and contentious role. Cumulatively, the pieces here confront, and respond innovatively to, the dilemmas that these two facets of housing create for law and policy at different scales of analysis. (1)

This collection of papers brings together an all-star cast of housing nerds. While the papers are an eclectic mix, they are pretty consistent in that they ask important questions about housing policy. Even better, the Introduction contains links to open access versions of each paper. They are listed below:

Part I – Housing and the Metropolis: Law and Policy Perspectives

1 – The Rise of the Homevoters: How the Growth Machine Was Subverted by OPEC and Earth Day By William A. Fischel

2 – How Land Use Law Impedes Transportation Innovation By David Schleicher

3 – The Unassailable Case against Affordable Housing Mandates By Richard A. Epstein

Part II – Housing as Community: Stability, Change, and Perceptions

4 – Balancing the Costs and Benefits of Historic Preservation By Ingrid Gould Ellen & Brian J. McCabe

5 – Historic Preservation and Its Even Less Authentic Alternative By Lior Jacob Strahilevitz

6 – Losing My Religion: Church Condo Conversions and Neighborhood Change By Georgette Chapman Phillips

7 – How Housing Dynamics Shape Neighborhood Perceptions By Matthew Desmond

Part III – Housing as Wealth Building: Consumers and Housing Finance

8 – Behavioral Leasing: Renter Equity as an Intermediate Housing Form By Stephanie M. Stern

9 – Housing, Mortgages, and Retirement By Christopher J. Mayer

10 – The Rise and (Potential) Fall of Disparate Impact Lending Litigation By Ian Ayres, Gary Klein, & Jeffrey West

Part IV – Housing and the Financial System: Risks and Returns

11 – Household Debt and Defaults from 2000 to 2010: The Credit Supply View By Atif Mian & Amir Sufi

12 – Representations and Warranties: Why They Did Not Stop the Crisis By Patricia A. McCoy & Susan Wachter

13 – When the Invisible Hand Isn’t a Firm Hand: Disciplining Markets That Won’t Discipline Themselves By Raphael W. Bostic & Anthony W. Orlando

Community Bankers and GSE Reform

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The Independent Community Bankers of America have release ICBA Principles for GSE Reform and a Way Forward. Although this paper is not as well thought-out as that of the Mortgage Bankers Association, it is worth a look in order to understand what drives community bankers.

The paper states that the smaller community banks

depend on the GSEs for direct access to the secondary market without having to sell their loans through a larger financial institution that competes with them. The GSEs help support the community bank business model of good local service by allowing them to retain the servicing on the loans they sell, which helps keep delinquencies and foreclosures low. And unlike other private investors or aggregators, the GSEs have a mandate to serve all markets at all times. This they have done, in contrast to some private investors and aggregators that severely curtailed their business in smaller and economically distressed markets, leaving those community bank sellers to find other outlets for their loan sales. (1)

The ICBA sets forth a set of principles to guide GSE reform, including

  • The GSEs must be allowed to rebuild their capital buffers.
  • Lenders should have competitive, equal, direct access on a single-
    loan basis.
  • Capital, liquidity, and reliability are essential.
  • Credit risk transfers must meet targeted economic returns.
  • An explicit government guarantee on GSE MBS is needed.
  • The TBA market for GSE MBS must be preserved.
  • Strong oversight from a single regulator will promote sound operation.
  • Originators must have the option to retain servicing, and servicing fees must be reasonable.
  • Complexity should not force consolidation.
  • GSE assets must not be sold or transferred to the private market.
  • The purpose and activities of the GSEs should be appropriately limited.
  • GSE shareholder rights must be upheld.

This paper does not really provide a path forward for GSE reform, but it does clearly state the needs of community bankers. That is valuable in itself. There is also a lot of common sense behind the principles they espouse. But it is a pretty conservative document, working from the premise that the current system is pretty good so if it ain’t broke, why fix it? I think other stakeholders believe the system is way more broke than community bankers believe it to be.

There are also some puzzlers in it this paper. Why the focus on GSE shareholder rights? Is it because many community banks held GSE stock before the financial crisis? Are there other reasons that this is one of their main principles?

Hopefully, over time community bankers will flesh out the thinking that went into this paper in order to fuel an informed debate on the future of the housing finance market.

 

 

Properly Insuring a Home

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Realtor.com quoted me in 3 Types of Insurance You Need to Buy a Home (and 4 You Don’t). It reads, in part,

When you buy a home, you will be showered with offers to buy insurance—and not just one type, but many types. Such awesome deals! So which ones do you really need?

There are a few that are downright essential, and others are nice but not necessary. Furthermore, others are total rip-offs to avoid at all costs.

To help you differentiate among them all, here’s a rundown of the types of insurance you’ll likely encounter on your home-buying journey and a reality check on whether you need them.

Title insurance

Do you need it? Absolutely!

Normally, this isn’t even a question because it’s almost always mandatory when you’re getting a mortgage. But if you’re paying all-cash, you have the option of skipping on title insurance. You shouldn’t.

Title insurance “ensures both the lender and the owner’s financial interests in the home are protected against loss due to title defects, liens, or other matters,” says Liane Jamason, a Realtor® and owner of the Jamason Realty Group at Smith & Associates Real Estate in Tampa, FL.

It’s especially important to get title insurance in transactions like short sales and foreclosures, which often carry the high risk of some kind of tax lien being attached to the property. Title insurance is going to safeguard against your needing to pay for liens, and will ensure the title is clear so no one down the road could claim they own the property and file a lawsuit.

If for some reason you’re dead set against getting title insurance, Jamason suggests you should at least get a lawyer to “thoroughly check the property’s history to ensure there could be no future claims to title.”

Homeowners insurance

Do you need it? You bet

Like title insurance, this is another one that’s not required if you own the house outright (you’ll need to have it with a mortgage), but this is necessary. Homeowners insurance covers you for a variety of things like fires and storms. You’ll want it even if you aren’t legally required to have it.

Eric Kossian, agency principal of InsurePro, a Washington state insurance agency, cites an example of a wealthy homeowner who had paid off his house and “figured since he had never had an insurance claim he would save himself the $700 a year in premium.” Then some kids near his home started a fire, which got out of control and burned down several houses—including his. It cost the homeowner about $450,000 in damages. Consider this a cautionary tale.

*     *     *

Mortgage protection life insurance

Do you need it? Not really.

In case you die while you’re still paying off a mortgage (bummer, we know), this insurance is supposed to make sure your family is financially covered when it comes to paying your mortgage. But it’s basically pointless.

“I would say as a general rule that mortgage life insurance or mortgage protection insurance is unnecessary,” says David Reiss, a law professor specializing in real estate at Brooklyn Law School. Reiss says consumers “are generally better served by a cheap term insurance policy from a well-rated insurance company,” and “you will generally get more protection per premium dollar with a term life insurance policy.”

Umbrella insurance

Do you need it? Usually not.

Umbrella insurance is basically insurance for your insurance. It vastly expands the amount of damages your insurance will cover. But it’s not necessarily worth it.

“One common rule of thumb is that an umbrella insurance policy should equal the net worth of the insured,” Reiss says. So for the average middle-class American homeowner, Reiss notes that an umbrella policy is generally “less relevant,” probably because your regular insurance covers enough. For the rich, or those who are “reasonably expecting” a rise in income, Reiss says it can be a good idea and worth researching further.

Plunging Minority Homeownership Rates

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Construction Dive quoted me in Why Minority Homeownership Rates Plunged After the Housing Crash — and How to Reverse The Trend. It opens,

The recovery from the 2007 U.S. housing crash is still underway, with the ramifications of foreclosures and subprime mortgages still playing out for many current and potential American homeowners. Northeastern markets are still struggling to clear out crisis-era inventory, largely due to foreclosure laws, and members of Generation X — one of the hardest hit groups during the crash — are just now building up the required financial strength and confidence to claw their way back to homeownership.

While the Census Bureau Housing Vacancy Survey indicated that U.S. homeownership overall was 63.5% in the first quarter of 2016 — down significantly from a 25-year average of 66.2% — the groups encountering the most difficulties snapping back from the housing crisis are the black and Hispanic populations.

The Census Bureau found that 41.5% of black households and 45.3% of Hispanic households are currently homeowners, compared to 72.1% of white households. And last year, while the Urban Institute projected that Hispanic homeownership would rise over the next 15 years, it also predicted that black homeownership would drop to 40%.

The stagnant and declining minority homeownership numbers are clear, but experts have varying views regarding why this situation is occurring and what can be done to reverse the trend.

 *     *     *

In Newark, NJ, for example, entire minority neighborhoods were targeted with home renovation schemes, which ended in high-interest home equity loans for the consumer, according to David Reiss, professor of law and academic program director for urban business entrepreneurship at Brooklyn Law School. “You would see entire streets with home improvement projects through the same company,” he said.

A study by University of Buffalo professor Gregory Sharp and Cornell University professor Matthew Hall found that “race was the leading explanation for why people lost homes they owned and turned back to rentals.” Sharp and Hall said that minorities were “exploited” by the mortgage lending system, which led to blacks being 50% more likely than whites to lose their homes and enter the rental market.

After the housing market crash, there weren’t enough educational resources and financial literacy programs available to minority groups to help them navigate the “new normal” of adjustable-rate mortgages and increases to their monthly payments, according to Franky Bonilla, with Churchill Mortgage in Houston. “Without access to even the most basic information, such as how to save money or properly document income, many borrowers were unequipped to overcome (these problems), and, as a result, many owners walked away from their homes,” he said.

How to boost homeownership among minorities

So with minority homeownership rates lagging — and in some cases sinking — since the housing crisis, what’s the answer to reverse the trend?

Bonilla, who is also a member of the National Association of Hispanic Real Estate Professionals (NAHREP), said approximately 60% of his business comes from minority homeowners and that this group in particular could benefit from borrower education and outreach, such as bilingual employees, as well as workshops and seminars.

“Lenders with more cultural diversity have an advantage because they can relate and communicate more effectively with individuals who might otherwise feel disadvantaged or intimidated by the mortgage process,” Bonilla said. “In turn, this creates an opportunity to establish a relationship at a personal level and determine which mortgage options are the best fit for each borrower’s unique financial situation.”

Another possible solution to increasing minority homeownership rates, along with homeownership among those who don’t meet the credit requirements for prime loans, is an overhaul of lending criteria for mortgages.

Reiss said there has been a move by some housing advocates to have credit for mortgage purposes reflect factors more indicative of future success as a homeowner. One of the critical issues, however, is to try to determine exactly how much credit is the right amount of credit. “You want to make credit available to people without having excessive default rates,” Reiss said. “Clearly the amount of credit we had in the early 2000s was too much credit, and it ended poorly for many people.”

Reiss added that home lending has always involved a careful balance between underwriting and available credit. “I think everyone would agree that the ‘Wild West’ days of lending were not good for American households in general,” he said.

Thursday’s Advocacy & Think Tank Round-Up

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  • The Institute of Housing Studies at DePaul University has issued a report analyzing foreclosure activity which finds that foreclosures are down in the Chicago area in 2014.  The report also finds that mortgage activity remains low while investor buyers have become a major factor in the single family market.
  • Miami Coalition for the Homeless has proposed a set of solutions to make housing in Miami affordable.  The prosed policy changes grew out of a cross sector symposium dubbed the 2015 Housing Summit – organized to promoting the creation and maintenance of affordable housing in Miami-Dade County, where 71% of monthly household income goes to housing and transportation.
  • The National Association of Realtors (NAR) would like to see the Federal Housing Authority (FHA)  increase National Loan Limits.  The National Loan Limit sets the individual loan limits available under the Government Sponsored Entities (Fannie and Freddie) and FHA and VA loan programs. In a comment letter to the FHA NAR argues that since housing prices have rebounded following the financial crisis – now expected  to surpass 2007’s prices, increases are in order.

Foreclosures & Credit Card Debt

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Credit Cards

Paul S. Calem, Julapa Jagtiani and William W. Lang have posted Foreclosure Delay and Consumer Credit Performance to SSRN. Effectively, it argues that long foreclosure delays may have reduced the credit card default rate because homeowners in default were able to pay down their credit card debt while living for free in their homes. The abstract reads,

The deep housing market recession from 2008 through 2010 was characterized by a steep rise in the number of foreclosures and lengthening foreclosure timelines. The average length of time from the onset of delinquency through the end of the foreclosure process also expanded significantly, averaging up to three years in some states. Most individuals undergoing foreclosure were experiencing serious financial stress. However, the extended foreclosure timelines enabled mortgage defaulters to live in their homes without making mortgage payments until the end of the foreclosure process, thus providing temporary income and liquidity benefits from lower housing costs. This paper investigates the impact of extended foreclosure timelines on borrower performance with credit card debt. Our results indicate that a longer period of nonpayment of mortgage expenses results in higher cure rates on delinquent credit cards and reduced credit card balances. Foreclosure process delays may have mitigated the impact of the economic downturn on credit card default.

The authors conclude,

our findings indicate that households do not consume all the benefits from temporary relief from housing expenses; instead, they use that temporary relief to cure delinquent credit card debt and reduce their credit card balances. Interestingly, we find that payment relief from loan modifications has a similar impact to payment relief from longer foreclosure timelines; both are associated with curing card delinquency and reducing card balances.

These households, however, are likely to become delinquent on their credit cards again within six quarters following the end of the foreclosure process. Thus, the results suggest that there may be added risk for nonmortgage lenders when foreclosures are completed and households must incur the transaction costs of moving and incur significant housing expenses once again. This implies an additional dimension of risk to credit card lenders that has not been observed previously. (23)

I am not sure what to make of these findings for borrowers, regulators, credit card lenders or mortgage lenders. Would a utility-maximizing borrower run up their credit card debt while in foreclosure? Should states seek to change foreclosure timelines to change consumer or lender behavior? Should profit-maximizing credit card lenders seek to further limit borrowing upon a mortgage default?  What should profit-maximizing mortgage lenders do? I have lots of questions but no good answers yet.