Budding GSE Reform

The Mortgage Bankers Association has released a paper on GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market (link to paper on this page). This paper builds on a shorter version that the MBA released a few months ago. Jim Parrott of the Urban Institute has provided a helpful comparison of the basic MBA proposal to two other leading proposals. This longer paper explains in detail

MBA’s recommended approach to GSE reform, the last piece of unfinished business from the 2008 financial crisis. It outlines the key principles and guardrails that should guide the reform effort and provides a detailed picture of a new secondary-market end state. It also attempts to shed light on two critical areas that have tested past reform efforts — the appropriate transition to the post-GSE system and the role of the secondary market in advancing an affordable-housing strategy. GSE reform holds the potential to help stabilize the housing market for decades to come. The time to take action is now. (1)

Basically, the MBA proposes that Fannie and Freddie be rechartered into two of a number of competitors that would guarantee mortgage-backed securities (MBS).  All of these guarantors would be specialized mortgage companies that are to be treated as regulated utilities owned by private shareholders. These guarantors would issue standardized MBS through the Common Securitization Platform that is currently being designed by Fannie and Freddie pursuant to the Federal Housing Finance Agency’s instructions.

These MBS would be backed by the full faith and credit of the the federal government as well as by a federal mortgage insurance fund (MIF), which would be similar to the Federal Housing Administration’s MMI fund. This MIF would cover catastrophic losses. Like the FHA’s MMI fund, the MIF could be restored by means of higher premiums after the catastrophe had been dealt with.  This model would protect taxpayers from having to bail out the guarantors, as they did with Fannie and Freddie at the onset of the most recent financial crisis.

The MBA proposal is well thought out and should be taken very seriously by Congress and the Administration. That is not to say that it is the obvious best choice among the three that Parrott reviewed. But it clearly addresses the issues of concern to the broad middle of decision-makers and housing policy analysts.

Not everyone is in that broad middle of course. But there is a lot for the Warren wing of the Democratic party to like about this proposal as it includes affordable housing goals and subsidies. The Hensarling wing of the Republican party, on the other hand, is not likely to embrace this proposal because it still contemplates a significant role for the federal government in housing finance. We’ll see if a plan of this type can move forward without the support of the Chair of the House Financial Services Committee.

Saving On Homeowners Insurance

Insurance Policy

Trulia quoted me in 5 Ways To Save On Homeowners Insurance. It opens,

Some basic decisions in life shouldn’t demand much debate in your mind. Behind car and life insurance, homeowners insurance is one of the biggest no-brainers. When golf ball–sized hail rips your Boca Raton, FL, roof to shreds, your dog bites a clueless runner, or someone breaks in and steals your vintage Larry Bird jersey and Grandmother’s pearl earrings, a basic homeowners insurance policy should have you covered. But as with any other form of shopping, it’s always best to look around, sniff out a good deal, and compare home insurance options. Luckily, deep discounts can be found. Here are five ways to save on your policy.

1. Shop around, then enlist help

Finding the biggest discount isn’t just for cars and airline tickets. In fact, a few phone calls and internet searches can land you some serious deals on homeowners insurance. “Start by looking to see if there are any companies that offer discounts,” says Cory Gagnon, associate financial adviser, The Beacon Group at Assante Wealth Management Ltd. in Calgary, Canada. “An insurance broker or financial planner can be very helpful in these situations as they have access to databases that allow them to source a wide variety of companies.”Then think about memberships you have — are you a veteran or AARP member? If you’ve used membership discounts for say, buying a car or booking a vacation, see if the association has discounts for homeowners insurance. Think hard about groups you’re part of: Check if your college alumni association offers discounts, or even the wholesale club you belong to (like Costco, BJ’s, or Sam’s Club).

2. Improve your home

Sometimes, Gagnon adds, little changes and improvements to your home can lead to lower premiums. “Some insurance companies offer lower rates for a variety of factors having to do with the structure and build of your home, including the type of wiring, plumbing, and structure material,” he says. “If you are in an older home, making an investment in upgrades to some of these core elements will make your home safer — for example, less threat of pipe bursts, electrical fires — and thus lower your insurance premiums with certain companies, saving you money in the long run.”

3. Know the difference between replacement cost and actual cash value

Homeowners insurance comes with options, and the best way to navigate those options is to know what they are. “One of the most important things that a homeowner should know about when shopping for [a] new or existing homeowners policy is the difference between replacement cost versus actual cash value [ACV],” explains Craig Ciotti, an insurance agent/broker with Fidishun Insurance & Financial Inc. in Yardley, PA. “Replacement cost will insure you for the cost that it would take to replace your home and all of the other personal property in it,” he says. “The other option is actual cash value. ACV is the actual value of your home and does not take into consideration zoning permits or removal of damaged property. ACV is more often used by investors and not homeowners.” If, for instance, a laptop you bought for $1,000 is stolen, with replacement cost insurance, you will get $1,000 for a new laptop. With ACV, you’ll get the current market value for the laptop — which will most likely be far less, since it has probably depreciated over time. ACV premiums generally cost less, but you’ll likely pay more out of pocket after a loss.

4. Agree to a higher deductible

As with other forms of insurance (ahem, car), you can save big on your policy if you simply increase your deductible. “This can shave a significant amount off of your annual premium, which is the good thing,” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “The bad thing about it is, if you have a casualty, you will be responsible for it until it reaches the higher deductible limit. Thus, you should be able to handle that additional amount before agreeing to the higher deductible. Given that your premium typically goes up when you make a claim, a silver lining of the higher deductible is that you will file fewer claims.”

Buying A First Home

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Realtor.com quoted me in Buying Your First Home? Better Make Sure It Has These 4 Things. It opens,

Finding the perfect starter home is a journey as well as a destination. You’ve got to know what you want, then adjust expectations to meet the reality of the market. In the end, you don’t have to settle on your “forever home”—just a place you’ll call home for at least five to seven years.

But that’s a long time in homeowner years, especially if you wake up each day in a place you wind up hating.

“You want to buy something that’s going to last,” says Carol Temple, an Arlington, VA, Realtor® who loves helping newbies find their first home.

So how do you know what’s going to stand the test of (a decent amount of) time? You’ve never done this before. You’re taking a leap of faith that you have the money, skills, and temperament to maintain the biggest purchase of your life so far.

We know—it’s scary. And overwhelming. But there is a foolproof formula to picking the right starter home.

1. Manageable monthly expenses

If you’ve been renting all your adult life, you’ll be surprised by how much owning a home actually costs. There’s a mortgage, real estate taxes (usually wrapped into your mortgage), insurance premiums, utilities, and the drip-drip-drip of maintenance costs. And here’s the fun part: All these costs usually increase with time!

“New homeowners are often not aware of how expenses can add up when they own a home,” says David Reiss, who teaches real estate law at Brooklyn Law School in Brooklyn, NY.

When calculating how much you can spend on a house, figure in all these costs, and then add a little more for unexpected expenses. Like replacing LED lightbulbs at $20 a pop. Or hiring a pro to prune that gorgeous oak in the backyard. Or maybe replacing your Grand Palais range that spontaneously combusted.

Make sure your final choice truly fits your budget. Got it? That may mean buying something smaller, older, or farther out than you originally intended.

2. Low maintenance

Maintenance costs are the great unknown in homeownership—the older the house, the more it will cost to keep running. So unless you have the handyman skills and desire to fix whatever comes up, it’s better for your starter house to be newer construction (less than 10 years old).

You may even want to consider brand-new construction, which costs more but whose parts are typically covered by a warranty. Standard coverage would be a one-year warranty for labor and materials, two years’ protection for mechanical defects—plumbing, electrical, heating, air conditioning, and ventilation systems—and 10 years for structural defects.

Whether you buy a new or existing home, don’t forget to hire a good home inspector to thoroughly identify potential problems.

“Even if the home buyers are handy, they may not want to be spending their time up on the roof looking for a leak or in the basement up to their knees in water,” Reiss says.

Monday’s Adjudication Roundup

A Resilient NYC

NYU’s Furman Center released a report, The Price of Resilience: Can Multifamily Housing Afford to Adapt? It explains that storm-proofing New York City

poses several special challenges not shared by all coastal areas. First, New York City is largely built out, with much of its building stock long predating current flood-resistant design standards. Resilience in New York, then, primarily means retrofitting older buildings, not just strengthening building codes for new construction. Second, much of the official guidance about how to retrofit residential properties to reduce risk and lower insurance premiums is geared toward 1-4 family buildings, reflecting the national housing stock. In New York City, though, only one-third of the buildings thought to be vulnerable to flooding are1-4 family, detached homes. A much larger number of housing units vulnerable to future storms are located in roughly 4,500 multifamily buildings with five or more rental units. Finding ways to cost effectively retrofit these types of buildings to protect residents and reduce insurance premiums for owners needs to be central to New York City’s storm-preparedness efforts.

Finally, the extreme shortage of affordable housing in New York may make the direct and indirect costs of retrofitting particularly hard to bear. Based on current federal policy, increased flood risk requires for many buildings either investment in physical improvements or payment of higher insurance premiums. Without external funding or other relief, there is no clear avenue to enact these resilience improvements while maintaining affordability. Eliminating all units below the predicted flood level, for example, could result in the loss of thousands of indispensable housing units. Even if units are not lost, property owners may pass on the costs of retrofitting buildings to residents through a rent increase, reducing the supply of affordable units in New York City’s coastal areas. For buildings that are constrained in their ability to raise rents and raise funds for improvements, like many of the rent stabilized and subsidized buildings in the city, the financial burden of making costly retrofits might be overwhelming, leading to the conversion of those buildings to market rate (when permitted), unsustainable operating budgets that may require a bail-out, or a large number of buildings left unprepared for future storms. The costs of not retrofitting, however, may be even more burdensome: building owners may face skyrocketing flood insurance premiums if they do not retrofit their buildings.

While I am not so sure that storm-proofing will be what pushes New York City’s housing stock into the unaffordable column (I think the relentless increases in demand might just to the job for units that are not rent regulated), the Furman Center report reminds us that we have a lot to do to protect New York from the next big storm. The Bloomberg Administration did a lot in a short time to identify what the City can do to increase the City’s resiliency. Given the quality of his housing and economic development team, there is reason to hope that the de Blasio Administration will continue to tackle the threat of climate change in a productive way.

The Furman Center report provides three concrete recommendations to ensure that NYC’s large stock of multi-family housing in flood zones is protected from future storm events:

  1. The Federal Emergency Management Agency (FEMA) should modify the guidelines for its National Flood Insurance Program for coverage of existing multifamily buildings;
  2. New York City should expand its Flood Resilience Zoning Text Amendment to cover buildings in the 500-year floodplain; and
  3. The city should revisit its existing rehabilitation programs to ensure that resilience measures can be readily funded; and it should require that buildings in the 100-year and 500-year floodplains that receive city assistance have adequate emergency and resilience plans.

These all seem like reasonable policies that should be implemented asap.