Tag Archives: guaranteed mortgage

Insuring Sustainable Housing

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photo by Mark Moz

I posted Insuring Sustainable Housing to SSRN (and BePress). The abstract reads,

Today’s FHA suffered from many of the same unrealistic underwriting assumptions that have done in so many lenders during the 2000s. It had also been harmed, like other lenders, 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 has also come under attack for the poor execution of some of its policies to expand homeownership. Leading commentators have called for the federal government to stop employing the FHA to do anything other than provide liquidity to the low end of the mortgage market. These arguments rely on a couple of examples of programs that were clearly failures but they fail to address the FHA’s long history of undertaking comparable initiatives. This article takes the long view and demonstrates that the FHA has a history of successfully undertaking new homeownership programs. At the same time, the article identifies flaws in the FHA model that should be addressed in order to prevent them from occurring if the FHA were to undertake similar initiatives in the future.

This short article is drawn from Underwriting Sustainable Homeownership: The Federal Housing Administration and The Low Down Payment Loan, 50 GA. L. REV. 1019 (2016).

Underwriting Sustainable Homeownership

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Mesa-Mesa Journal-Tribune FHA Demonstration Home-1925" by Marine 69-71

I have posted Underwriting Sustainable Homeownership: The Federal Housing Administration and the Low Down Payment Loan to SSRN (and to BePress). It is forthcoming in the Georgia Law Review. The abstract reads,

The United States Federal Housing Administration (“FHA”) has been a versatile tool of government since it was created during the Great Depression. The FHA was created in large part to inject liquidity into a moribund mortgage market. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety of additional social goals. These goals included supporting civilian mobilization during World War II; helping veterans returning from the War; stabilizing urban housing markets during the 1960s; and expanding minority homeownership rates during the 1990s. It achieved success with some of its goals and had a terrible record with others. More recently, the FHA is in the worst financial shape it has ever been in.

Today’s FHA suffers from many of the same unrealistic underwriting assumptions that have done in so many other lenders during the 2000s. It has also been harmed, like other lenders, by a housing market as bad as any seen since the Great Depression. As a result, the federal government recently announced the first bailout of the FHA in its history. At the same time that it has faced these financial challenges, the FHA has also come under attack for the poor execution of some of its policies to expand homeownership. Leading commentators have called for the federal government to stop using the FHA to do anything other than provide liquidity to the low end of the mortgage market. These critics rely on a couple of examples of programs that were clearly failures but they do not address the FHA’s long history of undertaking comparable initiatives. This article takes the long view and demonstrates that the FHA has a history of successfully undertaking new homeownership programs. At the same time, the article identifies flaws in the FHA model that should be addressed in order to prevent them from occurring if the FHA were to undertake similar initiatives in the future.

In order to demonstrate this, the article first sets forth the dominant critique of the FHA. Relying on often overlooked primary sources, it then sets forth a history of the FHA and charts its constantly changing roles in the housing finance sector. In order to give a more detailed picture of the federal government’s role in housing finance, the article also incorporates the scholarly literature regarding (i) the intersection of race and housing policy and (ii) the economics and finance literature regarding the role that down payments play in the appropriate underwriting of mortgages for low- and moderate-income households. The article concludes that the FHA can responsibly address objectives other than the provision of liquidity to the residential mortgage market. It further proposes that FHA homeownership programs for low- and moderate-income families should be required to balance access to credit with households’ ability to make their mortgage payments over the long term. Such a proposal will ensure that the FHA extends credit responsibly to low- and moderate-income households while minimizing the likelihood of future bailouts.

The Future of Fannie and Freddie: The Definitive Panel!

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The  NYU Journal of Law & Business has published The Future of Fannie and Freddie (also on SSRN):

This is a transcript of a panel discussion titled, “The Future of Fannie and Freddie.” The panelists were Dr. Mark Calabria from the Cato Institute; Professor David Reiss from Brooklyn Law School; Professor Lawrence White from NYU Stern School of Business; Dr. Mark Willis from NYU’s Furman Center for Real Estate and Urban Policy. The panel was moderated by Professor Michael Levine from NYU School of Law. Panelists looked at economic policy and future prospects for Fannie and Freddie. My remarks focused on the goals of housing finance policy.

The actual panel occurred some time ago, but it remains current given the limbo in which housing finance reform finds itself.

Reiss on Privatization of Fannie and Freddie

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BadCredit.org profiled an article of mine in Brooklaw Professor Pushes for Privatization of Fannie Mae/Freddie Mac. The profile opens,

Since the end of the Great Recession, policymakers, academics and economists have been struggling with a very difficult question — what should we do with Fannie Mae and Freddie Mac? Should the government continue its role in providing mortgage credit to millions of American?

Fordham University Associate Professor of Law and Ethics Brent J. Horton made a proposal in his forthcoming paper “For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933“:

“The best way to reduce risk taking at Fannie Mae is to subject its MBS offerings to the disclosure requirements of the Securities Act of 1933,” Horton writes.

However, Brooklyn Law School Professor of Law David Reiss believes “the problems inherent in Fannie Mae’s structure are greater than those that increased disclosure can address.”

In his response, titled “Who Should Be Providing Mortgage Credit to American Households?” Reiss points to increased privatization as one way to address the question of what to do with Fannie Mae and Freddi Mac.

Reiss on Who Should Be Providing Mortgage Credit to American Households?

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I have posted a short Response, Who Should Be Providing Mortgage Credit to American Households?, to SSRN (as well as to BePress).  The abstract reads,

Who should be providing mortgage credit to American households? Given that the residential mortgage market is a ten-trillion-dollar one, the answer we come up with had better be right, or we may suffer another brutal financial crisis sooner than we would like. Indeed, the stakes are as high as they were in the Great Depression when the foundation of our current system was first laid down. Unfortunately, the housing finance experts of the 1930s seemed to have a greater clarity of purpose when designing their housing finance system. Part of the problem today is that debates over the housing finance system have been muddled by broader ideological battles and entrenched special interests, as well as by plain old inertia and the fear of change. It is worth taking a step back to evaluate the full range of options available to us, as the course we decide upon will shape the housing market for generations to come. This is a Response to Brent Horton, For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933, 89 Tulane L. Rev. __ (forthcoming 2014-2015).

Reiss on The Future of the Private Label Securities Market

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I have posted The Future of the Private Label Securities Market to SSRN (as well as to BePress). I wrote this in response to the Department of Treasury’s request for input on this topic. The abstract reads,

The PLS market, like all markets, cycles from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and recent government interventions in it have, undoubtedly, added to that fear. In recent days, there has been a lot of industry pushback against the government’s approach, including threats to pull out of various sectors. But the government should not chart its course based on today’s news reports. Rather, it should identify fundamentals and stick to them. In particular, its regulatory approach should reflect an attempt to align incentives of market actors with government policies regarding appropriate underwriting and sustainable access to credit. The market will adapt to these constraints. These constraints should then help the market remain healthy throughout the entire business cycle.