Tag Archives: housing policy

New FHA Guidelines No Biggie

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(Original Purchases in Levittown Funded in Large Part by FHA Mortgages)

Law360 quoted me in New Guidelines For Bad FHA Loans Won’t Boost Lending (behind paywall). It opens,

The federal government on Thursday provided lenders with a streamlined framework for how it determines whether the Federal Housing Administration must be paid for a loan gone bad, but experts say the new framework will have limited effect because it failed to alleviate the threat of a Justice Department lawsuit.

The U.S. Department of Housing and Urban Development provided lenders with what it called a “defect taxonomy” that it will use to determine when a lender will have to indemnify the FHA, which essentially provides insurance for mortgages taken out by first-time and low-income borrowers, for bad loans. The new framework whittled down the number of categories the FHA would review when making its decisions on loans and highlighted how it would measure the severity of those defects.

All of this was done in a bid to increase transparency and boost a sagging home loan sector. However, HUD was careful to state that its new default taxonomy does not have any bearing on potential civil or administrative liability a lender may face for making bad loans.

And because of that, lenders will still be skittish about issuing new mortgages, said Jeffrey Naimon, a partner with BuckleySandler LLP.

“What this expressly doesn’t address is what is likely the single most important thing in housing policy right now, which is how the Department of Justice is going to handle these issues,” he said.

The U.S. housing market has been slow to recover since the 2008 financial crisis due to a combination of economics, regulatory changes and, according to the industry, the threat of litigation over questionable loans from the Justice Department, the FHA and the Federal Housing Finance Agency.

In recent years, the Justice Department has reached settlements reaching into the hundreds of millions of dollars with banks and other lenders over bad loans backed by the government using the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.

The most recent settlement came in February when MetLife Inc. agreed to a $123.5 million deal.

In April, Quicken Loans Inc. filed a preemptive suit alleging that the Justice Department and HUD were pressuring the lender to admit to faulty lending practices that they did not commit. The Justice Department sued Quicken soon after.

Policymakers at the Federal Housing Finance Agency, which serves as the conservator for Fannie Mae and Freddie Mac, and HUD have attempted to ease lenders’ fears that they will force lenders to buy back bad loans or otherwise indemnify the programs.

HUD on Thursday said that its new single-family loan quality assessment methodology — the so-called defect taxonomy — would do just that by slimming down the categories it uses to categorize mortgage defects from 99 to nine and establishing a system for categorizing the severity of those defects.

Among the nine categories that will be included in HUD’s review of loans are measures of borrowers’ income, assets and credit histories as well as loan-to-value ratios and maximum mortgage amounts.

Providing greater insight into FHA’s thinking is intended to make lending easier, Edward Golding, HUD’s principal deputy assistant secretary for housing, said in a statement.

“By enhancing our approach, lenders will have more confidence in how they interact with FHA and, we anticipate, will be more willing to lend to future homeowners who are ready to own,” he said.

However, what the new guidelines do not do is address the potential risk for lenders from the Justice Department.

“This taxonomy is not a comprehensive statement on all compliance monitoring or enforcement efforts by FHA or the federal government and does not establish standards for administrative or civil enforcement action, which are set forth in separate law. Nor does it address FHA’s response to patterns and practice of loan-level defects, or FHA’s plans to address fraud or misrepresentation in connection with any FHA-insured loan,” the FHA’s statement said.

And that could blunt the overall benefits of the new guidelines, said David Reiss, a professor at Brooklyn Law School.

“To the extent it helps people make better decisions, it will help them reduce their exposure. But it is not any kind of bulletproof vest,” he said.

Housing Affordability for Moderate-Income Households

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The Center for Housing Policy’s most recent issue of Housing Landscape gives its Annual Look at The Housing Affordability Challenges of America’s Working Households. The Center finds that

Overall, 15.2 percent of all U.S. households (17.6 million households) were severely housing cost burdened in 2013. Renters face the biggest affordability challenges. In 2013, 24.3 percent of all renter households were severely burdened compared to 10.0 percent of all owner households. (1, footnote omitted)

The Center summarizes “the severe housing cost burdens of low- and moderate-income working households.” (1) Unsurprisingly. these households face

significantly greater affordability challenges than the overall population. In 2013,21.2 percent of working households were severely cost burdened (9.6 million households).Twenty-five percent of working renters and 17.1 percent of working homeowners paid more than half of their incomes for housing that year. (1)

The report notes some modest good news:

Since 2010,the overall share of working households with a severe housing cost burden has  fallen.This modest decline is the result of a complex combination of factors, including the shift of  some higher-income households from homeownership into rental housing. An insufficient supply of rental housing and sustained increases in rents have led to millions of working households having to pay too much for housing or live far from their jobs, in substandard housing,or in poor-quality neighborhoods. (1)

Federal and local housing policy has not yet come to grips with the fact low- and moderate-income households have been paying a significant portion of their income in housing costs year after year. Household have to make difficult trade-offs among cost, distance from employment, housing quality and neighborhood quality.

The Center notes that more can be done to support affordable housing at the federal and state levels, but it is not clear to me that there are any politically feasible policy responses that can make a serious dent in the affordability of housing for working households.

Tax Expenditure Wars: Wealthy Households v. Poor

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Henry Rose has posted How Federal Tax Expenditures That Support Housing Contribute to Economic Inequality to SSRN. This short article examines “how federal income tax laws benefit more affluent owner households but provide no benefits to economically-strapped renter households.” (1) Housing policy analysts (myself included) constantly bemoan the regressive nature of federal tax policy as it relates to housing, but it is always worth looking at the topic with updated numbers. And this article contains some tables with some interesting numbers.

One table provides an overview of the estimated tax savings (in billions) in FY 2014 for five federal tax expenditures for owners of housing that they occupy:

Mortgage Interest Deduction  (MID)                                                 $66.91

Property Tax Deduction (PTD)                                                        $31.59

Capital Gains Exclusion on Sales                                                   $35.54

Net Imputed Rental Income Exclusion                                            $75.24

Discharge of Mortgage Indebtedness Exclusion                            $3.1

Total                                                                                                 $212.38

The next table provides an estimated distribution of two of these tax expenditures (FY 2014, savings in millions):

Tax-Filer AGI                PTD Tax Savings         MID Tax Savings                

Below $50,000              $693                              $1,443

$50,000-75,000             $2,190                           $4,330

$75,000-100,000           $3,478                           $6,581

$100,000-200,000         $13,648                         $27,421

$200,000+                     $11,798                         $29,340

Total                              $31,806                         $69,115                               

The article concludes by noting that despite

the great disparity in economic positions between owners and renters, federal tax expenditures lavish tax savings on primarily affluent owners and provide none for renters. The federal tax expenditures for owners are so generous that interest can be deducted on mortgage balances up to $1,000,000 and can also be taken on second homes, even yachts, as well as primary residences. It is difficult to conceive of a federal public policy that more directly promotes economic inequality than the federal tax expenditures that support owners of housing but are not available to renters. (9-10, footnote omitted)

I don’t expect this disparity to be addressed any time in the near future, given the current political environment, but it is certainly one that should stay at the top of any list of reforms for those concerned with promoting equitable federal housing policies.

Housing Policy and Justice

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John Infranca has posted Housing Resource Bundles:Distributive Justice and Federal Low-Income Housing Policy to SSRN. The abstract reads,

Only one in four eligible households receives some form of rental assistance from the federal government. Nonetheless, there is no time limit for the receipt of this assistance; individuals can continue to receive benefits as long as they satisfy eligibility requirements. In addition, individuals who do obtain assistance frequently have higher incomes than those denied it. Beyond simply providing housing, federal rental assistance is enlisted to serve a myriad of additional policy goals — including furthering economic integration and providing access to better neighborhoods — that can exacerbate inequities between those who receive benefits and those denied assistance. These broader objectives often increase the cost of housing assistance and reduce the number of households served.

Given increasingly limited resources and the growing demand for rental assistance, difficult decisions must be made regarding how to satisfy a range of conflicting programmatic goals. Although for at least four decades legal scholars, economists, public policy experts, and politicians have denounced the inequities in existing housing policy, no one has provided a detailed analysis of the specific ways in which this policy departs from norms of distributive justice and of how it might be made more equitable. This Article moves the conversation beyond simply decrying existing inequities and instead carefully analyzes federal housing policy in light of specific theories of distributive justice. Drawing on the philosophical literature, it evaluates the specifics of existing policies, and their distributional impacts, in light of five theories of distributive justice. It then proposes a new structure for federal rental assistance, which would allow recipients to choose among a set of “housing resource bundles.” This approach will not only satisfy the most salient understandings of distributive justice, but will also advance the concerns that underpin other distributive justice theories and allow federal housing policy to more effectively embrace a plurality of programmatic goals.

I was particularly intrigued by one (modest?) proposal:

A commitment to distributing all federal housing assistance to provide for equality of resources would demand that the housing resource bundle approach be put in place for all citizens. Each individual would be limited in the total amount of housing assistance they could receive during their lifetime. All citizens would receive an equal sum of housing resources, either through direct rental assistance or a deduction of mortgage interest (or some combination). This would result in a substantial change in the allocation of resources, resulting in a more equitable distribution of all federal housing assistance. (62-63)

This proposal highlights the extent to which federal housing policy heavily favors upper-income households which benefit greatly from the mortgage interest deduction. The proposal also highlights a limitation of the article.  While it it makes clear that housing policy violates norms of distributive justice, it does not chart a practical course to achieve political change in an environment where the mortgage interest deduction is one of the most heavily protected federal tax expenditures. That being said, the article helps to clarify what is at stake in debates over federal housing policy and provides some intellectual clarity for those who study it.

Here Comes The Housing Trust Fund

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HUD has published an interim rule in the Federal Register to governing the Housing Trust Fund (HTF). The HTF could generate about a half a billion dollars a year for affordable housing initiatives, so this is a big deal. The purpose “of the HTF is to provide grants to State governments to increase and preserve the supply of rental housing for extremely low- and very low-income families, including homeless families, and to increase homeownership for extremely low- and very low-income families.” (80 F.R. 5200) HUD intends to “open this interim rule for public comment to solicit comments once funding is available and the grantees gain experience administering the HTF program.” (80 F.R. 5200)

The HTF’s main focus is rental housing, which often gets short shrift in federal housing policy

States and State-designated entities are eligible grantees for HTF. Annual formula grants will be made, of which at least 80 percent must be used for rental housing; up to 10 percent for homeownership; and up to 10 percent for the grantee’s reasonable administrative and planning costs. HTF funds may be used for the production or preservation of affordable housing through the acquisition, new construction, reconstruction, and/or rehabilitation of nonluxury housing with suitable amenities. (80 F.R. 5200)

Many aspects of federal housing policy are effectively redistributions of income to upper income households. The largest of these redistributions is the mortgage interest deduction.  Households earning over $100,000 per year receive more than three quarters of the benefits of that deduction while those earning less than $50,000 receive close to none of them.

So, the HTF is a double win for a rational federal housing policy because it focuses on (i) rental housing for (ii) extremely low- and very low-income households.

While not wanting to be a downer about such a victory for affordable housing, I will note that Glaeser and Gyourko have demonstrated how local land use policies can run counter to federal affordable housing policy. Might be worth it for federal housing policy makers to pay more attention to that dynamic . . ..

Homeless in America

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The Department of Housing Urban Development released Part 1 of The 2014 Annual Homeless Assessment Report (AHAR) to Congress.  Part 1 provides Point-in-Time Estimates of Homelessness. Its key findings include,

  • In January 2014, 578,424 people were homeless on a given night. Most (69 percent) were staying in residential programs for homeless people, and the rest (31 percent) were found in unsheltered locations.
  • Nearly one-quarter of all homeless people were children under the age of 18 (23 percent or 135,701). Ten percent (or 58,601) were between the ages of 18 and 24, and 66 percent (or 384,122) were 25 years or older.
  • Homelessness declined by 2 percent (or 13,344 people) between 2013 and 2014 and by 11 percent (or 72,718) since 2007. (1)

The report notes that in “2010, the Administration released Opening Doors: Federal Strategic Plan to Prevent and End Homelessness, a comprehensive plan to prevent and end homelessness in America.” (3) The plan had four goals:

  1. Finish the job of ending chronic homelessness in 2015
  2. Prevent and end homelessness among Veterans by 2015
  3. Prevent and end homelessness for families, youth, and children by 2020
  4. Set a path to ending all types of homelessness (3)

HUD claims success on all four fronts:

  1. The number of individuals experiencing chronic homelessness declined by 21 percent, or 22,892 people, between 2010 and 2014.
  2. The number of homeless veterans declined by 33 percent (or 24,837 people) since 2010, and most of the decline was in the number of veterans staying in unsheltered locations.
  3. Since 2010 the number of homeless people in families has declined by 11 percent (or 25,690 people).
  4. Overall, homelessness has declined by more than 62,000 people since 2010 (62,042), a 10 percent reduction since the release of Opening Doors. (3)

In many ways, the success of American housing policy comes down to the question — can all Americans have a safe and affordable place to call home? The Administration answers this question in the affirmative. And this report appears to demonstrate that the Administration’s plan to end homelessness is working.

While I am skeptical of claims that we have finally figured out how to systematically address homelessness, I am happy to see that it is trending downward over the last few years.  This report was authored by some serious people, including Dr. Dennis Culhane of the National Center on Homelessness among Veterans at the University of Pennsylvania, so there is reason to trust these numbers. One can hope that this trend continues, but given the financial insecurity so many households face, I am worried that it will not.

Reiss on Threats to Housing

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CBS News interviewed me (and gave a shout out to REFinblog.com) about The 5 Biggest Threats to the Housing Recovery. It reads in part:

3. The government’s role in the mortgage market will change

The U.S. government currently backs about 97 percent of mortgages though the Federal Housing Authority, Fannie Mae and Freddie Mac. That’s unlikely to continue. It may take years, but the feds will eventually start edging out of the mortgage market. Private mortgage financiers will have to fill the void. But exactly how that will happen and what effect it will have on borrowers remains to be seen.

“The entire lending industry needs [government] leadership as to what the bulk of the market is going to look like in the long run,” said David Reiss, professor at Brooklyn Law School and editor of real estate finance industry site REFinBlog. “How tight or loose will credit be? The Federal Housing Finance Agency will decide this to a large extent, as seen by the recent announcement that Fannie and Freddie will no longer buy interest only mortgages.”