Evidence and Innovation in Housing

Lee Anne Fennell and Benjamin Keys have posted the Introduction to their new book, Evidence and Innovation in Housing Law and Policy, to SSRN. It opens,

No area of law and policy presents more important and pressing questions, or ones more central to human well-being, than that of housing. Yet academic discourse around housing is too often siloed into separate topical areas and disciplinary approaches, while remaining distanced from the contentious housing policy debates unfolding in communities across the nation. In June 2016, the Kreisman Initiative on Housing Law and Policy at the University of Chicago Law School convened a conference in downtown Chicago with the goal of breaking down these barriers and forging new connections – between different facets of housing law and policy, between different disciplinary approaches to housing issues, between academic inquiry and applied policy, and between the lessons of the past and adaptations for the future.

This volume is the product of that conference and the dialogue it provoked among academics, practitioners, and policy makers. Its baker’s dozen of contributions comprises cutting-edge interdisciplinary work on housing and housing finance from leading scholars in law, economics, and policy. The pieces individually and collectively showcase how research and policy can come together in the housing arena. We hope the end result will have lasting relevance in setting the course – and identifying the obstacles – for housing law and policy going forward.

This book is organized around two interlocking roles that housing serves: as a vehicle for building community, and as a vehicle for building wealth. These facets of housing carry implications both for the households who consume residential services and for the larger economic, political, and spatial domains in which housing plays such a primary and contentious role. Cumulatively, the pieces here confront, and respond innovatively to, the dilemmas that these two facets of housing create for law and policy at different scales of analysis. (1)

This collection of papers brings together an all-star cast of housing nerds. While the papers are an eclectic mix, they are pretty consistent in that they ask important questions about housing policy. Even better, the Introduction contains links to open access versions of each paper. They are listed below:

Part I – Housing and the Metropolis: Law and Policy Perspectives

1 – The Rise of the Homevoters: How the Growth Machine Was Subverted by OPEC and Earth Day By William A. Fischel

2 – How Land Use Law Impedes Transportation Innovation By David Schleicher

3 – The Unassailable Case against Affordable Housing Mandates By Richard A. Epstein

Part II – Housing as Community: Stability, Change, and Perceptions

4 – Balancing the Costs and Benefits of Historic Preservation By Ingrid Gould Ellen & Brian J. McCabe

5 – Historic Preservation and Its Even Less Authentic Alternative By Lior Jacob Strahilevitz

6 – Losing My Religion: Church Condo Conversions and Neighborhood Change By Georgette Chapman Phillips

7 – How Housing Dynamics Shape Neighborhood Perceptions By Matthew Desmond

Part III – Housing as Wealth Building: Consumers and Housing Finance

8 – Behavioral Leasing: Renter Equity as an Intermediate Housing Form By Stephanie M. Stern

9 – Housing, Mortgages, and Retirement By Christopher J. Mayer

10 – The Rise and (Potential) Fall of Disparate Impact Lending Litigation By Ian Ayres, Gary Klein, & Jeffrey West

Part IV – Housing and the Financial System: Risks and Returns

11 – Household Debt and Defaults from 2000 to 2010: The Credit Supply View By Atif Mian & Amir Sufi

12 – Representations and Warranties: Why They Did Not Stop the Crisis By Patricia A. McCoy & Susan Wachter

13 – When the Invisible Hand Isn’t a Firm Hand: Disciplining Markets That Won’t Discipline Themselves By Raphael W. Bostic & Anthony W. Orlando

Grading Trump’s Economic Performance

TheStreet.com quoted me in President Trump Grades Out Well in the Eyes of Financial Advisors. I was a contrarian voice in this story:

President Trump has been in the office for a little over a month, and love him or hate him, financial industry specialists seem fairly bullish on his performance from an economic point of view.

That’s the takeaway from a single question posted to a handful of highly-respected U.S. financial advisors – “how would you grade President Trump’s economic performance one month into his term?”

All the advisors contacted by TheStreet stated, in unison, that it’s very early in the Trump presidency, and that events can change on a dime when it comes to key consumer financial issues like jobs, the stock market, gross domestic product, the housing market, and consumer spending.

But the reaction from virtually all the money managers in touch with TheStreet.com was positive, with a healthy share of As graded out. Here are those grades, and why wealth managers are, for now at least, putting. Trump at the head of the class:

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David Reiss, Professor of Law, Brooklyn Law School, Brooklyn, N.Y. – “I give President Trump a first term grade of C- for the housing market. He has indicated that he wants to roll back Dodd-Frank and the Consumer Financial Protection Bureau that it created. That will have a negative impact on homeowners who are protected by Dodd-Frank’s Qualified Mortgage and Ability-to-Repay rules. Trump started the process of rolling back Dodd-Frank with a vague executive order directing Treasury to review financial regulations. If Trump decides to completely gut the homeowner protections contained in Dodd-Frank, his grade will plummet further as predatory lending rears its head once again in the housing market.”

With media mavens, political activists, and even Main Street Americans squaring off over one of the most controversial Presidents in history, the outlook from financial specialists — with the exception of Reiss — on the economy is a bullish one, even if it’s only a month or so into the Trump administration.

Hidden Mortgage Fees

photo by Tania Liu

TheStreet.com quoted me in Hidden Fees Cost Consumers Billions: Which Ones Are the Worst? It opens,

Consumers are notoriously combative over high product and sales fees, and who can blame them?

Fees for common items like mortgages, credit cards, bank accounts and online deliverables, among many others, can really add up, and do hit consumers hard in the pocketbook.

That goes double for so-called “hidden fees” – shadowy charges on goods and services that buyers usually don’t know about.

A new study by the Washington, D.C.-based National Economic Council shows that Americans lose “billions of dollars” from such hidden fees. Another study of communications firms like AT&T, Verizon and Comcast by the Consumer Federation of America pegs hidden fee costs at $60 billion annually.

Few hidden fees are favored by consumer advocates, but some are worse than others.

“My household bills look very much like those of a typical consumer – two cell phones, cable, broadband and landline telephone,” says Dr. Mark Cooper, the CFA’s Director of Research and author of the communications industry report. “Hidden fees – excluding the price of the service, taxes, and governmental fees – added about 25% to my total bill.”

The CFA’s “Hidden Fees” report documents a pervasive pattern of abuse across many industries, adds Cooper, “but hidden fees on communications services are particularly troubling because these digital services have become absolute necessities in the American household.”
Besides cable and internet service costs, which routinely stand atop the list of industry offenders, what other hidden fees continue to haunt American consumers?

Here’s a quick list:

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Mortgage fees – Outside of the cable/telecom arena, the mortgage sector may well boast the most hidden fees. “When applying for a mortgage, a borrower can be hit with all kinds of obscure fees like processing fees, notary fees, courier fees, even fees for sending emails,” says David Reiss, a professor of law at Brooklyn Law School. ” Before paying the mortgage application fee, the borrower should ask whether any of the fees are waivable. If they are charged by the lender, as opposed to a third party like a government agency, they may very well be waivable.”

Consumers should be on the lookout for hidden fees, across the board. Some solid due diligence can keep a few more bucks in your pocket and strike a blow against companies with fee programs that operate in the shadows, time and time again.

But as of right now, those hidden fees are paying off for companies, and at U.S. consumers’ expense.

Investing in Mortgage-Backed Securities

photo by https://401kcalculator.org

US News & World Report quoted me in Why Investors Own Private Mortgage-Backed Securities. It opens,

Private-label, or non-agency backed mortgage securities, got a black eye a few years ago when they were blamed for bringing on the financial crisis. But they still exist and can be found in many fixed-income mutual funds and real estate investment trusts.

So who should own them – and who should stay away?

Many experts say they’re safer now and are worthy of a small part of the ordinary investor’s portfolio. Some funds holding non-agency securities yield upward of 10 percent.

“The current landscape is favorable for non-agency securities,” says Jason Callan, head of structured products at Columbia Threadneedle Investments in Minneapolis, pointing to factors that have reduced risks.

“The amount of delinquent borrowers is now at a post-crisis low, U.S. consumers continue to perform quite well from a credit perspective, and risk premiums are very attractive relative to the fundamental outlook for housing and the economy,” he says. “Home prices have appreciated nationwide by 5 to 6 percent over the last three years.”

Mortgage-backed securities are like bonds that give their owners rights to share in interest and principal received from homeowners’ mortgage payments.

The most common are agency-backed securities like Ginnie Maes guaranteed by the Federal Housing Administration, or securities from government-authorized companies like Fannie Mae and Freddie Mac.

The agency securities carry an implicit or explicit guarantee that the promised principal and interest income will be paid even if homeowners default on their loans. Ginnie Mae obligations, for instance, can be made up with federal tax revenues if necessary. Agency securities are considered safe holdings with better yields than alternatives like U.S. Treasurys.

The non-agency securities are issued by financial firms and carry no such guarantee. Trillions of dollars worth were issued in the build up to the financial crisis. Many contained mortgages granted to high-risk homeowners who had no income, poor credit or no home equity. Because risky borrowers are charged higher mortgage rates, private-label mortgage securities appealed to investors seeking higher yields than they could get from other holdings. When housing prices collapsed, a tidal wave of borrower defaults torpedoed the private-label securities, triggering the financial crisis.

Not many private-label securities have been issued in the years since, and they accounted for just 4 percent of mortgage securities issued in 2015, according to Freddie Mac. But those that are created are considered safer than the old ones because today’s borrowers must meet stiffer standards. Also, many of the non-agency securities created a decade or more ago continue to be traded and are viewed as safer because market conditions like home prices have improved.

Investors can buy these securities through bond brokers, but the most common way to participate in this market is with mutual funds or with REITs that own mortgages rather than actual real estate.

Though safer than before, non-agency securities are still risky because, unlike agency-backed securities, they can incur losses if homeowners stop making their payments. This credit risk comes atop the “prepayment” and “interest rate” risks found in agency-backed mortgage securities. Prepayment risk is when interest earnings stop because homeowners have refinanced. Interest rate risk means a security loses value because newer ones offer higher yields, making the older, stingier ones less attractive to investors.

“With non-agencies, you own the credit risk of the underlying mortgages,” Callan says, “whereas with agencies the (payments) are government guaranteed.”

Another risk of non-agency securities: different ones created from the same pool of loans are not necessarily equal. Typically, the pool is sliced into “tranches” like a loaf of bread, with each slice carrying different features. The safest have first dibs on interest and principal earnings, or are the last in the pool to default if payments dry up. In exchange for safety, these pay the least. At the other extreme are tranches that pay the most but are the first to lose out when income stops flowing.

Still, despite the risks, many experts say non-agency securities are safer than they used to be.

“Since the financial crisis, issuers have been much more careful in choosing the collateral that goes into a non-agency MBS, sticking to plain vanilla mortgage products and borrowers with good credit profiles,” says David Reiss, a Brooklyn Law School professor who studies the mortgage market.

“It seems like the Wild West days of the mortgage market in the early 2000s won’t be returning for quite some time because issuers and investors are gun shy after the Subprime Crisis,” Reiss says. “The regulations implemented by Dodd-Frank, such as the qualified residential mortgage rule, also tamp down on excesses in the mortgage markets.”

Friday’s Government Reports Roundup

Friday’s Government Reports Roundup

Wednesday’s Academic Roundup