Tag Archives: housing policy

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.”

Building a Model for Housing Finance

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Following up on Friday’s post, I want to discuss Chambers, Garriga and Schlagenhauf’s draft that they recently posted to SSRN (free here).  It presents some interesting historical analogies to the issues we face as we attempt to chart a new direction for federal housing policy.

They too review the housing subsidies that exist in the financing system and in the tax code.  They attempt to “study the effects of changes in government regulation on individual incentives and relative prices” (4)  They include an interesting Table (2) on page 8 that shows the growing percentage of home mortgages that were insured or guaranteed by the FHA and VA.

What I find most interesting about this article is that it attempts to model the impact of better financing terms on the housing market.  For instance, they argue that their “model suggest that the extension of the FRM contract from 20 to 30 years can explain around 12 percent of the increase in ownership” for a certain period of time. (25)  More generally, they find that the “total impact of mortgage innovation is approximately 21 percent” when combined with “a narrowing mortgage interest rate wedge . . ..” (31) I would love to see more economics articles that model the impact of credit terms on housing prices and homeownership rates.  While this seems fundamental to housing economics, there is less out there about this than there should be.

While their conclusion that “mortgage innovation did make a significant contribution to the increase in homeownership between 1940 and 1960”  is not surprising, their model helps us understand why that is the case. (26)

More on Housing America’s Future

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I blogged about some of the big themes in the Bipartisan Policy Center’s Housing America’s Future report.  Today, I take a closer look at their position on housing finance in particular:

The report states that “it is highly unlikely that private financial institutions would be willing to assume both interest rate and credit risk, making long-term, fixed-rate financing considerably less available than it is today or only available at higher mortgage rates.” (42) This statement is far from uncontroversial.  First, the jumbo private label-market had originated 30 year fixed rate mortgages.  There is at least some tolerance for a product in which the private sector bears both credit and interest rate risk.  Second, the fixation on the 30 year fixed mortgage product is counter-productive.  The typical American household moves every seven years.  In an invisible way, pushing people into 30 year fixed mortgages can harm them.  Think, for instance, of a young couple moving into a one bedroom condominium unit.  The odds that they will be there for 30 years without ever even refinancing to get a lower interest rate or to access the equity they built up is miniscule.  But that couple will be paying an interest rate premium to have their interest rate fixed for that whole thirty years.  That couple would likely be better served by a 5/1 or 7/1 ARM which would balance a low interest rate in the near term with the risk that they stay longer than expected and pay a higher interest rate in the long term.

The reports fixation on put-back risk (46) is a canard.  There is no need to regulate in this area.  Now that private parties are aware that it is a serious issue, they will negotiate accordingly.

The report’s concern with “uncertainty related to pending regulations and implementation of new rules” also seems misguided. (47)  The housing finance system just went through a near death experience.  Of course there is some uncertainty as we plan to take it off of life support.

The report’s position that any “government support for the housing finance system should be explicit and appropriately priced to reflect actual risk” is right on, but the devil will be in the details. (48) How can we set up a system in which political interference won’t distort the pricing of risk?  The government does not have a good track record in this regard.

More anon . . .