Tag Archives: homeownership

The Founding & Evolution of HUD

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Omer Wazir

I had previously blogged about HUD at 50, a hefty tome filled with a lot of interesting chapters. Today, I focus on Chapter 1, written byJill Khadduri, The Founding and Evolution of HUD: 50 Years, 1965-2015 (starting at page 5). The abstract for the chapter reads,

This is an institutional history of the U.S. Department of Housing and Urban Development (HUD), focused on the development of HUD’s major policies and programs over the 50 years from its founding in 1965 to 2015. The chapter emphasizes how the successive secretaries of HUD and the political administrations they operated within shaped the agency and its programmatic responses to housing and urban issues. It attempts to place the evolution of HUD within the contexts of the housing, housing finance, and community development industries; other governmental institutions, including the U.S. Congress and other levels of government; and the most urgent housing and urban problems perceived during each secretary’s tenure. This chapter benefits from hindsight on which policies and programs appear to have had lasting importance. However, it does not focus on the outcomes of HUD policies and is not an assessment of HUD’s effectiveness in dealing with the issues of poverty, urban distress, housing quality and affordability, and fair housing over the past 50 years. (5)

There will be a lot that is familiar to housing nerds in this chapter, but its real value lies in putting all of the pieces together in a coherent narrative, charting the big changes in federal housing policy. How was federal housing policy related to urban policy? How was housing policy related to housing finance policy?  Where do Community Development Block Grants fit in?  How about housing vouchers? Fair housing policy? Enterprise Zones and Empowerment Zones? How important was homeownership vis-à-vis rental housing policy? When did special needs populations and the homeless get more resources? How did large-scale disaster relief fit into HUD’s mission? These issues, and more, are addressed and placed in broader context. Bottom line for housing nerds and aspiring housing nerds: read it, or at least skim it.

P2P, Mortgage Market Messiah?

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Monty Python's Life of Brian

As this is my last post of 2015, let me make a prediction about the 2016 mortgage market. Money’s Edge quoted me in Can P2P Lending Revive the Home Mortgage Market? It opens,

You just got turned down for a home mortgage – join the club. At one point the Mortgage Bankers Association estimated that about half of all applications were given the thumbs down. That was in the darkest housing days of 2008 but many still whisper that rejections remain plentiful as tougher qualifying rules – requiring more proof of income – stymie a lot of would be buyers.

And then there are the many millions who may not apply at all, out of fear of rejection.

Here’s the money question: is new-style P2P lending the solution for these would-be homeowners?

The question is easy, the answers are harder.

CPA Ravi Ramnarain pinpoints what’s going on: “Although it is well documented that banks and traditional mortgage lenders are extremely risk-averse in offering the average consumer an opportunity for a home loan, one must also consider that the recent Great Recession is still very fresh in the minds of a lot of people. Thus the fact that banks and traditional lenders are requiring regular customers to provide impeccable credit scores, low debt-to-income (DTI) ratios, and, in many cases, 20 percent down payments is not surprising. Person-to-person lending does indeed provide these potential customers with an alternate avenue to realize the ultimate dream of owning a home.”

Read that again: the CPA is saying that for some on whom traditional mortgage doors slammed shut there may be hope in the P2P, non-traditional route.

Meantime, David Reiss, a professor at Brooklyn Law, sounded a downer note: “I am pretty skeptical of the ability of P2P lending to bring lots of new capital to residential real estate market in the short term. As opposed to sharing economy leaders Uber and Airbnb which ignore and fight local and state regulation of their businesses, residential lending is heavily regulated by the federal government. It is hard to imagine that an innovative and large stream of capital can just flow into this market without complying with the many, many federal regulations that govern residential mortgage lending. These regulations will increase costs and slow the rate of growth of such a new stream of capital. That being said, as the P2P industry matures, it may figure out a cost-effective way down the line to compete with traditional lenders.”

From the Consumer Financial Protection Bureau (CFPB) to Fannie and Freddie, even the U.S. Treasury and the FDIC, a lot of federal fingers wrap around traditional mortgages. Much of it is well intended – the aims are heightened consumer protections while also controlling losses from defaults and foreclosures – but an upshot is a marketplace that is slow to embrace change.

Building HOME

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The HOME Coalition, a coalition of affordable housing organizations, has posted Building HOME: The HOME Investment Partnerships Program’s Impact on America’s Families and Communities, its 2015 report. I don’t think HOME is a household word, at least when it is in ALLCAPS, so here are the basics, taken from the report:

For over 20 years, the HOME Investment Partnerships Program (HOME) has proven to be one of the most effective, locally driven tools to help states and communities provide access to safe, decent, and affordable housing for low-income residents. The U.S. Department of Housing and Urban Development (HUD) reports that since HOME’s authorization in 1990, $26.3 billion in HOME funds have leveraged an additional $117 billion in public and private resources to help build and preserve nearly 1.2 million affordable homes and to provide direct rental assistance to more than 270,000 families. The HOME Coalition estimates that this investment has supported nearly 1.5 million jobs and has generated $94.2 billion in local income.

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With HOME, Congress created a program that provides states and communities with unmatched flexibility and local control to meet the housing needs that they identify as most pressing. HOME is the only federal housing program exclusively focused on addressing such a wide range of housing activities. States and local communities use HOME to fund new production where affordable housing is scarce, rehabilitation where housing quality is a challenge, rental assistance when affordable homes are available, and provide homeownership opportunities when those are most needed. Moreover, this flexibility means that states and communities can quickly react to changes in their local housing markets. (7, emphasis removed)

The report calls attention to the fact that Congress has been making big cuts to HOME funding since 2010. These cuts show the complexities inherent in federal housing policy, coming as they do right on the heels of the creation of the National Housing Trust Fund in 2008.

Congress appears to giveth and taketh away from housing programs in equal measure. As an added bonus for Congress, it taketh away on-budget items (HOME) and giveth off-budget items (NHTF, funded by Fannie and Freddie surcharges), making it an even more politically expedient trade-off. HOME dollars are a lot more flexible than NHTF dollars, so even a dollar for dollar trade has significant downsides for state housing programs. There is a lot not to like about this development in federal housing policy.

Fannie, Freddie & The Affordable Housing Feint

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Robert J. Shapiro

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Elaine C. Kamarck

 

 

 

 

 

Robert J. Shapiro and Elaine C. Kamarck have posted A Strategy to Promote Affordable Housing for All Americans By Recapitalizing Fannie Mae and Freddie Mac. While it presents as a plan to fund affordable housing, the biggest winners would be speculators who bought up shares of Fannie and Freddie stock and who may end up with nothing if a plan like this is not adopted.  The Executive Summary states that

This study presents a strategy for ending the current conservatorship and majority government ownership of Fannie and Freddie in a way that will enable them, once again, to effectively promote greater homeownership by average Americans and greater access to affordable housing by low-income households. This strategy includes regulation of both enterprises to prevent a recurrence of their effective insolvency in 2008 and the associated bailouts, including 4.0% capital reserves, regular financial monitoring, examinations and risk assessments by the Federal Housing Finance Agency (FHFA), as dictated by HERA. Notably, an internal Treasury analysis in 2011 recommended capital requirements, consistent with the Basel III accords, of 3.0% to 4.0%. In addition, the President should name a substantial share of the boards of both enterprises, to act as public interest directors. The strategy has four basic elements to ensure that Fannie and Freddie can rebuild the capital required to responsibly carry out their basic missions, absorb losses from future housing downturns, and expand their efforts to support access to affordable housing for all households:

  • In recognition of Fannie and Freddie’s repayments to the Treasury of $239 billion, some $50 billion more than they received in bailout payments, the Treasury would write off any remaining balance owed by the enterprises under the “Preferred Stock Purchase Agreements” (PSPAs).
  • The Treasury also would end its quarterly claim or “sweep” of the profits earned by Fannie and Freddie, so their future retained earnings can be used to build their capital reserves.
  • Fannie and Freddie also should raise roughly $100 billion in additional capital through several rounds of new common stock sales into the market.
  • The Treasury should transfer its warrants for 79.9% of Fannie and Freddie’s current common shares to the HTF [Housing Trust Fund] and the CMF [Capital Magnet Fund], which could sell the shares in a series of secondary stock offerings and use the proceeds, estimated at $100 billion, to endow their efforts to expand access to affordable housing for even very low-income households.

Under this strategy, Fannie and Freddie could once again ensure the liquidity and stability of U.S. housing markets, under prudent financial constraints and less exposure to the risks of mortgage defaults. The strategy would dilute the common shares holdings of current private investors from 20% to 10%, while increasing their value as Fannie and Freddie restore and claim their profitability. Finally, the strategy would establish very substantial support through the HTF and CPM for state programs that increase access to affordable rental housing by very low-income American and affordable home ownership by low-to-moderate income households.

Wow — there is a lot that is very bad about this plan.  Where to begin? First, we would return to the same public/private hybrid model for Fannie and Freddie that got us into so much trouble to begin with.

Second, it would it would reward speculators in Fannie and Freddie stock. That is not terrible in itself, but the question would be — why would you want to? The reason given here would be to put a massive amount of money into affordable housing. That seems like a good rationale, until you realize that that money would just be an accounting move from one federal government account to another. It does not expand the pie, it just makes one slice bigger and one slice smaller. This is a good way to get buy-in from some constituencies in the housing industry, but from a broader public policy perspective, it is just a shuffling around of resources.

There’s more to say, but this blog post has gone on long enough. Fannie and Freddie need to be reformed, but this is not the way to do it.

 

Wednesday’s Academic Roundup

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The Low Cost of Homeownership

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TheStreet.com quoted me in Why the Extra Costs of Owning a Home Are Lower Than Consumer Expectations. It reads, in part,

First-time homebuyers are often apprehensive about the extra costs of owning a house, fearful that routine maintenance and repairs will add up quickly, exceeding their original budget.

But their estimates about replacing air filters, mowing the lawn and conducting minor repairs are often much higher than average costs. Consumers have trouble estimating the actual amount and said it would cost $15,070 for home maintenance repairs each year, according to a recent survey by NeighborWorks America, a Washington, D.C-based organization focused on affordable housing.

The actual amount is more likely to be in the range of 1% to 3% of a home’s value or $2,000 to $6,000 nationwide, said Douglas Robinson, a spokesman for NeighborWorks America. Even some current homeowners’ estimates were above the average amount and predicted repairs to cost $12,360. The perception among current renters was even worse with a prediction of $20,503.

“The important thing to remember about buying a home is that there are costs after the purchase that go beyond the monthly mortgage,” he said. “By setting up a savings plan and budget for these costs – items such as landscaping, air conditioning and heating system maintenance – a homeowner will be better equipped to take on the expenses without having to use a credit card or worse, a high-cost emergency loan.”

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Home Emergencies

While they might appear to be rare, homeowners annually should prepare themselves to handle at least one unexpected major emergency such as replacing the boiler or roof in the aftermath of a major storm or flooding in the basement where water needs to be pumped out immediately to protect the foundation, said David Reiss, a law professor at Brooklyn Law School. Establishing an emergency fund would help protect a homeowner when these problems arise so consumers are not forced to turn to more expensive options of debt such as credit cards.

“If a homeowner has an emergency fund, he or she will feel like a genius when it comes time to use it,” he said. “The next step, of course, is to start saving up immediately for the next problem because as most homeowners know – there will be a next problem.”

Some homeowners might find that chronic problems such as the leaky roof are worse than the “acute ones such as the boiler giving out in the winter,” Reiss said.

“This is because we will do whatever it takes to turn the heat back on,” he said. “But we learn to live with the occasional leak and end up feeling like we can ignore it. However, water damage is bad for a house and always gets worse.”

Wednesday’s Academic Roundup

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