Tag Archives: Great Depression

Trump’s Plans to Privatize Fannie and Freddie

Posted on by
Reply
from Cato Institute website, https://www.cato.org/people/mark-calabria

Mark Calabria, OMB Associate Director for Treasury, Housing, and Commerce

I was interviewed on  WBUR-FM’s On Point (distributed by American Public Radio), hosted by Meghna Chakrabarti for an episode on How Trump Plans To Get Government out of the Mortgage Business. The link has the recording of the show as well as a transcript.

The transcript of the interview starts,

CHAKRABARTI: Now that President Trump is back in the White House, it seems that he intends to get the job done this time around. Mark Calabria has returned to Trump’s administration, this time working on housing policy at the Office of Management and Budget. Bill Pulte is now director of FHFA, and he just made the highly unusual move of appointing himself chair of both Fannie Mae and Freddie Mac, making the regulator and the regulated basically the same.

Pulte also fired 14 of the 25 sitting board members at Fannie and Freddie. A shakeup many are suspecting is a first step in leading these two companies out of government control and into privatization. We’re talking about a huge part of the U.S. economy that underpins the housing market. So this hour, we want to explore what privatization of Fannie and Freddie actually means, what it should look like, and how it might have an impact on homeowners and the housing market.

So to do that, David Reiss joins us. He’s a clinical professor of law at Cornell Law School and Cornell Tech, an expert in housing finance and policy. Professor Reiss, welcome to On Point.

DAVID REISS: Meghna, thank you so much.

CHAKRABARTI: I have to tell you that I actually can’t believe that it’s been 17 years since the financial crisis of 2008.

Let’s dust off the memory banks professor and go back to before 2008 and start there. Can you just remind us like what Fannie Mae and Freddie Mac were, what their purpose was, who owned them, et cetera?

REISS: I’m gonna go even a little bit further back than Fannie and Freddie’s creation, because I think it’s really gonna help people visualize what’s at stake here.

And if you think back to the 19th century and somebody was trying to buy a house, they didn’t have that many options. A house has always been a very expensive thing to buy, so they need to borrow some money to buy a house. And how could you do that?

Maybe if you’re rich, you could do it, or had a rich uncle, but otherwise you need to go to somebody who has capital and that you could borrow it and give them some interest in return. And pay them back over time, and be able to live in that house while you’re paying back the amount of money that you borrowed. And so if people think of It’s a Wonderful Life where there’s the Bailey Brothers building in loans and where they, people deposit their small savings into the buildings and loan.

And then some people are then able to borrow some money from the buildings and loan for mortgages. And there’s the famous scene where there’s a panic at the bank. And Jimmy Stewart says, Mrs. Kennedy, your money is in Mrs. Smith’s house. And Mrs. Smith, your money is in Ms. Macklin’s house.

And that’s the way it was done in the 19th century and the early 20th century. But there were real limitations to that. Sometimes communities didn’t have a lot of capital to lend people, so maybe in out west or in the Midwest there wasn’t a lot of capital, like there might’ve been back east in Boston or New York.

And so people who could have handled the mortgage just didn’t have access to it. It was like they were living in a dry area, and the fresh flowing credit didn’t reach their dry community. So during the Great Depression and the New Deal the government started to intervene, to spread credit out across the country in a way that kind of provided liquidity to all the communities where people wanted to borrow.

And Fannie Mae was a creature of the New Deal, but really took off in the ’70s along with its sibling Freddie Mac. And effectively, what those two companies were designed by Congress to do was to ensure that capital could go across state borders in a way that banks were typically not allowed to do. And they effectively created at first a national market for mortgage credit, and effectively when they access the global credit markets over time, an international global market for credit. So they’re really intermediaries.

Shaping the NYC Skyline

Posted on by

David Shamshovich, Camila Almeida, and Brenda Slochowsky just posted an episode of their podcast, Shaping The NYC Skyline. In this episode (mysteriously titled “Uncovering the Whole Elephant: The Evolution of Real Estate” — mysterious, that is, until you listen to it).

They interviewed me back in May when I was at Brooklyn Law School. The Apple podcast write-up states

Buckle up, Skyliners, for an illuminating episode featuring Professor David Reiss, formerly of Brooklyn Law School and now at Cornell Law School and Cornell Tech. Renowned for his expertise in real estate finance and community development, Professor Reiss has shaped countless legal minds, including our very own David Shamshovich, with his practical approach to complex concepts. This episode offers a rare glimpse into his journey from NYU Law School and prestigious law firms to his influential role in academia, where he has spent over two decades demystifying real property law.

Starting as an associate at major law firms, David soon discovered his passion for teaching. This led him to Brooklyn Law School, where he served as a professor and the founding director of the Community Development Clinic. His dedication to education is matched by his commitment to real-world impact, evidenced by his work with not-for-profits and his previous role as Chair of the NYC Rent Guidelines Board.

In this episode, David delves into the critical role the Community Development Clinic has played in providing hands-on experience to students, preparing them for real-world transactional and corporate real estate challenges. He emphasizes the importance of consumer protection in the housing market, drawing lessons from the subprime mortgage crisis. David also shares insights on the evolution of real estate finance, discussing the transition from mutual savings to sophisticated global capital markets, and the lasting impacts of historical events like the Great Depression and the 2007-2008 financial crisis.

Listeners will gain a deeper understanding of how these complex systems work and the importance of regulatory frameworks in protecting consumers and maintaining market stability. David’s ability to simplify intricate concepts has made him a beloved figure among students and colleagues alike, earning him a reputation as one of the best in his field.

Join us as we explore Professor David Reiss’s extraordinary career, his innovative approach to legal education, and his deep belief in the power of practical experience. Without further ado, we present Professor David Reiss, a beacon of knowledge and a guiding light in Shaping the NYC Skyline!

More on Shaping the NYC Skyline:

Website – https://www.seidenschein.com/podcast/

LinkedIn – https://www.linkedin.com/company/shaping-the-nyc-skyline/

Instagram – Shaping the NYC Skyline (@shapingthenycskyline)

YouTube – https://www.youtube.com/@ShapingtheNYCSkyline

Rethinking The Federal Home Loan Bank System

Posted on by

photo by Tony Webster

Law360 published my column, Time To Rethink The Federal Home Loan Bank System. It opens,

The Federal Housing Finance Agency is commencing a comprehensive review of an esoteric but important part of our financial infrastructure this month. The review is called “Federal Home Loan Bank System at 100: Focusing on the Future.”

It is a bit of misnomer, as the system is only 90 years old. Congress brought it into existence in 1932 as one of the first major legislative responses to the Great Depression. But the name of the review also signals that the next 10 years should be a period of reflection regarding the proper role of the system in our broader financial infrastructure.

Just as the name of the review process is a bit misleading, so is the name of the Federal Home Loan Bank system itself. While it was originally designed to support homeownership, it has morphed into a provider of liquidity for large financial institutions.

Banks like JPMorgan Chase & Co., Bank of America Corp., Citibank NA and Wells Fargo & Co. are among its biggest beneficiaries and homeownership is only incidentally supported by their involvement with it.

As part of the comprehensive review of the system, we should give thought to at least changing the name of the system so that it cannot trade on its history as a supporter of affordable homeownership. But we should go even farther and give some thought to spinning off its functions into other parts of the federal financial infrastructure as its functions are redundant with theirs. 

Insuring Homeownership — Best of the ABA

Posted on by

The American Bar Association selected my short article, Insuring Sustainable Homeownership, as part of “The Best of ABA Sections”–a compilation of some of the best articles published by the ABA’s sections, forums, and divisions.  It was published in the ABA’s journal, GPSolo and it is drawn from Insuring Sustainable Homeownership,  published in  20 (March/April 2018).  It opens,

The Federal Housing Administration (FHA) has suffered from many of the same unrealistic underwriting assumptions that did in so many lenders during the 2000s. It, too, was harmed by a housing market as bad as any seen since the Great Depression. As a result, the federal government announced in 2013 that the FHA would require the first bailout in its history. At the same time that it faced these financial challenges, the FHA came under attack for poor execution of some of its policies attempting to expand homeownership opportunities. This article examines the criticism that has been leveled at FHA and the goals the agency should pursue.

Housing in the Trump Era

Posted on by

 

The Real Estate Transactions Section of the American Association of Law Schools has issued the following Call for Papers:

Access + Opportunity + Choice: Housing Capital, Equity, and Market Regulation in the Trump Era

Program Description:

The year 2018 marks the 10th anniversary of the 2008 housing crisis—an event described as the most significant financial and economic upheaval since the Great Depression. This year is also the 50th anniversary of the Fair Housing Act, which upended many decades of overt housing discrimination. Both events remind us of the significant role that housing has played in the American story—both for good and for bad.

Of the many aspects of financial reform that followed 2008, much of the housing finance-related work was centered around mortgage loan origination and creating incentives and rules dealing with underwriting and the risk of moral hazard. Some of these reforms include the creation of the qualified mortgage safe-harbor and the skin-in-the-game risk retention rules. But when it came to the secondary mortgage market, little significant reform was undertaken. The only government action of any serious importance related to the federal government—through the Federal Housing Finance Agency (FHFA)—taking over control of Fannie Mae and Freddie Mac. This major government intervention into the workings of the country’s two mortgage giants yielded takings lawsuits, an outcry from shareholders, and the decimation of the capital reserves of both companies. Despite Fannie and Freddie having both paid back all the bailout funds given to them, the conservatorship remains in place to this day.

In the area of fair housing, the past several years saw the Texas Department of Housing and Community Affairs v. Inclusive Communities case whereby the U.S. Supreme Court upheld (and narrowed the scope of) the disparate impact theory under the Fair Housing Act. We also saw efforts aimed at reducing geographic concentrations of affordable housing through the Obama administration’s promulgation of the affirmatively furthering fair housing rule.

Yet, meaningful housing reform remains elusive. None of the major candidates in the most recent presidential election meaningfully addressed the issue in their policy platforms, and a lack of movement in resolving the Fannie/Freddie conservatorship is viewed as a major failure of the Obama administration. Additionally, housing segregation and access to affordable mortgage credit continues to plague the American economy.

In recent months, the topics of housing finance reform and providing Americans with credit (including mortgage credit) choices have been a point of focus on Capitol Hill and in the Trump White House. Will these conservations result in meaningful legislation or changes in regulatory approaches in these areas? Will programs like the low-income-housing tax credit, the CFPB’s mandatory underwriting requirements, public housing subsidies, and the government’s role in guaranteeing and securitizing mortgage loans significantly change? Where are points of possible agreement between the country’s two major parties in this area and what kinds of compromises can be made?

Call for Papers:

The Real Estate Transactions Section looks to explore these and related issues in its 2019 AALS panel program titled: “Access and Opportunity: Housing Capital, Equity, and Market Regulation in the Trump Era.” The Section invites the submission of abstracts or full papers dealing broadly with issues related to real estate finance, the secondary mortgage market, fair housing, access to mortgage credit, mortgage lending discrimination, and the future of mortgage finance. There is no formal paper requirement associated with participation on the panel, but preference will be given to those submissions that demonstrate novel scholarly insights that have been substantially developed. Untenured scholars in particular are encouraged to submit their work. Please email your submissions to Chris Odinet at codinet@sulc.edu by Friday, August 3, 2018. The selection results will be announced in early September 2018. In additional to confirmed speakers, the Section anticipates selecting two to three papers from the call.

Confirmed Speakers:

Rigel C. Oliveri, Isabelle Wade and Paul C. Lyda Professor of Law, University of Missouri School of Law

Todd J. Zywicki, Foundation Professor of Law, George Mason University Antonin Scalia Law School

David Reiss, Professor of Law and Research Director for the Center for Urban Business Entrepreneurship, Brooklyn Law School

Eligibility:

Per AALS rules, only full-time faculty members of AALS member law schools are eligible to submit a paper/abstract to Section calls for papers. Faculty at fee-paid law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit.

All panelists, including speakers selected from this Call for Papers, are responsible for paying their own annual meeting registration fee and travel expenses.

The Miraculous Continuous Workout Mortgage

Posted on by

Professor Robert Shiller

Nobel Prize winner Robert Shiller et al. have posted Continuous Workout Mortgages: Efficient Pricing and Systemic Implications to SSRN. The paper opens,

The ad hoc measures taken to resolve the subprime crisis involved expending financial resources to bail out banks without addressing the wave of foreclosures. These short-term amendments negate parts of mortgage contracts and question the disciplining mechanism of finance. Moreover, the increase in volatility of house prices in recent years exacerbated the crisis. In contrast to ad hoc approaches, we propose a mortgage contract, the Continuous Workout Mortgage (CWM), which is robust to downturns. We demonstrate how CWMs can be offered to homeowners as an ex ante solution to non-anticipated real estate price declines.

The Continuous Workout Mortgage (CWM, Shiller (2008b)) is a two-in-one product: a fixed rate home loan coupled with negative equity insurance. More importantly its payments are linked to home prices and adjusted downward when necessary to prevent negative equity. CWMs eliminate the expensive workout of defaulting on a plain vanilla mortgage. This subsequently reduces the risk exposure of financial institutions and thus the government to bailouts. CWMs share the price risk of a home with the lender and thus provide automatic adjustments for changes in home prices. This feature eliminates the rational incentive to exercise the costly option to default which is embedded in the loan contract. Despite sharing the underlying risk, the lender continues to receive an uninterrupted stream of monthly payments. Moreover, this can occur without multiple and costly negotiations. (1, references omitted)

If it is not obvious, this is a radical idea.  It was not even contemplated before the financial crisis. That being said, it is pretty brilliant financial innovation, one that should not just be discussed by academics. The paper provides a lot more detail about the proposal for those who are interested. And if you want to avoid taxpayer bailouts of the housing market in the future, you should be interested.

Preparing for the Next Housing Tsunami

Posted on by

Greg Kaplan et al. posted The Housing Boom and Bust: Model Meets Evidence to SSRN. The abstract reads,

We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.

I think the last sentence is worth pondering a bit:  “a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.” During the Great Depression, the federal government took steps that relieved the debt burden of over a million households by extending the terms of their mortgages and lowering the interest rates on them.

While this was no panacea, it did let millions stay in their homes during a period of great financial stress. The steps taken to help struggling homeowners during the recent Great Recession were much more timid than those taken during the Great Depression. This paper adds to a body of literature that suggests we should not be so timid the next time we are hit by an economic tsunami.