Tag Archives: Urban Institute

Fannie & Freddie and Multifamily

Posted on by

The Urban Institute has posted a Housing Finance Policy Center Brief, The GSEs’ Shrinking Role in the Multifamily Market. It opens,

Though the two government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—are best known for their dominant role in the single-family mortgage market, they have also been major providers of multifamily housing financing for more than 25 years. Their role in the multifamily market, however, has declined substantially since the housing crisis and has reverted to more normalized levels. In addition, even as the GSEs continue to meet or exceed their multifamily affordable housing goals, their financing for certain underserved segments of the market has fallen steeply in recent years.

Given recent declines, policymakers and regulators should consider maintaining or increasing the GSEs’ footprint in the multifamily market, especially in underserved segments. The scorecard cap increases and exemptions recently employed by the Federal Housing Finance Agency (FHFA) to slow the decline in GSE multifamily volume have been somewhat effective, but they may not be enough to prevent the GSEs’ role from shrinking further. (1)

The policy brief’s main takeaway is that “policymakers and regulators should consider maintaining or increasing GSEs’ role in the multifamily market.” (8) I was struck by the fact that this policy brief pretty much took for granted that it is good for the GSEs to have such a big (and increasing) role in the multifamily market:

Though the multifamily market continues to remain strong and private financing is readily available today, it is also poised to grow significantly because of rising property prices and higher future demand. This raises the question of whether the GSEs should continue to shrink their multifamily footprint even further below the level of early 2000s, a period of relatively stable housing market. (8)

Government intervention in markets is usually called for when there is a market failure. The policy brief indicates the opposite — “private financing is readily available today.” The brief does argue that financing “backed by pure private capital is likely to be concentrated within the more profitable mid-to-high end of the market.” (9) That does not indicate that there is a market failure, just that borrowing costs should be cheaper for such projects. If the federal government is going to effectively subsidize a functioning credit market through the GSEs, it should make sure that it is getting something concrete in return, like affordable housing. Just supporting a credit market generally because it tends to support affordable housing is an inefficient way to achieve public goods like affordable housing. It also is a recipe for special interest capture and a future housing finance crisis. To the extent that this private credit market can function on its own, the government should limit its role to safety and soundness regulation and affordable housing creation.

Housing Finance Reform at the AALS

Posted on by
The Financial Institutions and Consumer Financial Services Section and the Real Estate Transactions section of the American Association of Law Schools hosted a joint program at the AALS annual meeting on The Future of the Federal Housing Finance System. I moderated the session, along with Cornell’s Bob Hockett.
Former Representative Brad Miller (D-N.C.) keynoted.  Until recently he was a Senior Fellow, at the Center for American Progress and is now a Senior Fellow at the Roosevelt Institute. He was followed by four more great speakers:
The program overview was as follows:
The fate of Fannie Mae and Freddie Mac are subject to the vagaries of politics, regulation,public opinion, the economy, and not least of all the numerous cases that were filed in 2013 against various government entities arising from the placement of the two companies into conservatorship. All of these vagaries occur, moreover, against a backdrop of surprising public and political ignorance of the history and functions of the GSEs and their place in the broader American financial and housing economies. This panel will take the long view to identify how the American housing finance market should be structured, given all of these constraints. Invited speakers include academics, government officials and researchers affiliated to think tanks. They will discuss the various bills that have been proposed to reform that market including Corker-Warner and Johnson-Crapo. They will also address regulatory efforts by the Federal Housing Finance Agency to shape the federal housing finance system in the absence of Congressional reform.
During the presentations, I felt a bit of awe for the collective knowledge of the speakers.  The program also emphasized for me how much there always is to learn about a topic as complex as housing finance.
Laurie Goodman was kind enough to let me post her PowerPoint slides from the program. If you are looking for a good overview of the current state of housing finance reform, you will want to take a look at them.
I was a bit depressed by the slide titled, “Why GSE reform is unlikely before 2017:”
1. There is no sense of urgency: GSEs are profitable, current system is functioning.
2. Higher legislative priorities.
3. No easy answers as to what a new housing finance system should look like.
4. Bipartisan action requires compromise, and some believe they have more to lose than to gain by compromising in this arena.
While the slide depressed me, I think it offers a pretty realistic assessment of where we are. I hope Congress and the Obama Administration prove me wrong.

Accurately Measuring Mortgage Availability

Posted on by

The Urban Institute’s Housing Finance Policy Center has posted a research report, Measuring Mortgage Credit Availability Using Ex-Ante Probability of Default. This report tackles an important subject:

How to strike a balance between credit availability and risk to achieve a sustainable housing market is a much-debated topic today, but these discussions are not grounded in good measurements of credit availability and risk. We address this problem below with a new index that measures credit availability and risk simultaneously

The first section of the paper discusses the limitations of the existing measures. The second section describes our development of the new index, which distills borrower credit profiles, loan products and terms, and macro economic conditions into a measurement of the weighted average probability of default for mortgages originated at a given time. The third section illustrates the value of this measure by empirically exploring the varying risk appetites of the market as a whole, and of market segments, which directly aids evidence-based policymaking on how to open the tight credit box. The final section discusses the limitations of this new index. (1)
The report concludes,
Measuring a concept as complicated and varied as credit access is no easy task. Yet this is an important time to ensure that it is being measured accurately. As we seek to reform the housing finance system, Congress, the housing finance industry, advocacy groups, policymakers, and even the general public need to clearly understand how well the market is providing access to mortgage credit for borrowers. (18)
I say amen to that. There is a slim chance that housing finance reform may be back on the table in Washington, given the midterm election results. We need as much good data we can get in order to structure a system based on solid principles rather than on the views of special interests that typically dominate this debate.
.

Housing Finance Reform at a Glance

Posted on by

The Urban Institute has posted its November Housing Finance At A Glance.  This is a really valuable resource. The introduction provides a nice overview of recent developments in the area:

With a sweeping midterm election victory for the GOP, the path to legislative GSE reform got considerably narrower. Thus, the focus for reform turns to the FHFA and FHA, where we expect significant movement in the coming months. Over the past six months, the FHFA has asked for input on a variety of issues, and we have commented on them all: guarantee fees and loan level pricing adjustments, Private Mortgage Insurance Eligibility requirements (PMIERs), the single security, and affordable housing goals.
The FHFA has made a concerted effort to open the credit box, strengthening the provision by which lenders are relieved from much of their put-back risk and raising the maximum loan-to-value ratio for some GSE loans from 95 to 97. Both will help expand access without unduly increasing GSE risk. FHFA Director Mel Watt has indicated in recent speeches that work is underway to further clarify reps and warrants, with more guidance on the sunset provision, an independent resolution process for put-back disputes, and remedies short of a put-back for lesser mistakes.
As our new credit availability index indicates, these actions to open the credit box are very important. Our index shows that post-crisis loans have half the credit risk of loans made in the 2000-2003 period. The GSE channel is particularly tight, with about a third of the risk of the 2000-2003 period. This is corroborated by the data in our special feature, which shows that only 8.3 percent of recent Fannie loans (page 34) and 7.4 percent of recent Freddie loans (page 36) have FICOs under 700, compared to 35-37 percent in 1999-2004.
On the FHA side, there have also been initiatives to open the credit box, as outlined in the Blueprint for Access program. Since then, the FHA has released the initial critical draft chapters of their guidebook and a draft of the taxonomy of defects. Many hope to see lower mortgage insurance premiums to broaden access and lessen the risk of adverse selection as better credit flees to the less costly GSEs. Given that their actuary now projects that the FHA’s Mutual Mortgage Insurance Fund will not reach the statutory reserve requirements until 2016, however, such a move is far from certain.
Risk Sharing Developments
The GSEs continue to broaden their risk sharing activities, now turning to front-end risk sharing deals. Prior to this month, they had focused exclusively, and with much success, on laying off risk already on their books, known as back-end risk sharing. Fannie has laid off risk on 7.5 percent of their book of business and Freddie on 11.9 percent of theirs (page 21), both far exceeding the requirements of the Conservatorship Scorecard. The GSEs started including mortgages over 80 LTV in these transactions in May.
This month saw a very meaningful step in bringing private capital back into the mortgage market: the first front-end risk sharing deal, JPMorgan’s Madison Avenue Securities 2014-1 (page 21). JP Morgan warehoused loans made by JP Morgan Chase bank, then sold them in bulk into a newly issued Fannie Mae MBS, presumably for a very meaningful reduction in guarantee fees. JP Morgan retained the first 4.75 percent subordinated interest, and a 26.88 bps servicing strip that absorbs losses before the subordinated interest. The risk on the 4.75 percent subordinated interest was sold in the capital markets in the form of credit linked notes. Redwood Trust is also reported to be contemplating a front-end risk sharing transaction.
Front-end risk sharing bears important similarities to the private capital/catastrophic insurance structure contemplated by many GSE reform proposals. It is thus an administrative opportunity to experiment deliberately with a truly reduced government footprint in the conventional mortgage market. (3)
I am very excited by the possibility of putting private capital in a first loss position for residential mortgages and agree with UI that the stars are aligning, at least a little bit, for this to become a reality. Many interests will need to be balanced for this to move forward, but politicians of all stripes should be worried about leaving Fannie and Freddie in limbo for much longer.

Reiss on Saving Thousands on Your Mortgage!

Posted on by

MainStreet.com quoted me in You Can Save Thousands on Your Mortgage By Taking This Tiny Step.  It reads in part,

Homeowners can save thousands of dollars when they work with counselor to get their mortgages modified and decrease their odds of defaulting again.

A new study for NeighborWorks America by the Urban Institute determined that homeowners were able to avoid spending millions of dollars annually because of the National Foreclosure Mitigation Counseling (NFMC) program. Homeowners working with NFMC program counselors are nearly three times more likely to obtain a mortgage modification and are nearly twice as likely to get their mortgage back on track without a modification.

After working with counselors, homeowners are 60% less likely to re-default after curing a serious delinquency and able to complete short sales faster than homeowners who don’t work with counselors.

The research is based on analysis of nearly 240,000 homeowners with outcomes observed through June 2013. More than 1.8 million homeowners have been helped by the NFMC program, administered by NeighborWorks America since it began in March 2008.

  *     *     *

Since buying a home is something that most people only do once or twice in their lives, there is no question that homeowners whose mortgages are in default or at risk of default should look for assistance as soon as possible, said David Reiss, professor of law at Brooklyn Law School in New York.

“Losing their home is something that most never do at all, so to think that going it alone is the best strategy is a mistake,” he said. “Foreclosure counselors know the range of options available to borrowers and may have access to more direct lines of communication with lenders. They also will have a better sense of when to complain to regulators about bad behavior by lenders.”

Cool Mortgage Tool

Posted on by

The Urban Institute has created a cool interactive tool to map mortgages in the United States. Enterprise describes the tool as follows: it

maps 12 years of data on more than 100 million mortgage originations throughout the U.S. by race and ethnicity, illustrating how the housing boom and bust affected borrowers of different backgrounds by metropolitan area. According to the data, not only were African-American and Hispanic communities particularly damaged by the housing bust, but they have also been the least likely to recover since the recession. The map also shows how geographically uneven the housing recovery has been. For instance, while mortgage originations have only decreased 18 percent in San Francisco and San Jose since 2005, they have fallen by 39 percent in Detroit.

The Urban Institute argues that

For a full mortgage market recovery, we need to expand the credit box again. A number of reforms can be undertaken to encourage lending to creditworthy borrowers who would have qualified before the housing boom. A return to 2005 and 2006 lending practices would be ill-fated, but the pendulum has unquestionably swung too far. Today’s tight standards have locked out many prospective borrowers from homeownership, disproportionately preventing African American and Hispanic families from building wealth and benefiting from the recovery.

There is a growing outcry to loosen credit. It is important that those calling for that loosening also support reforms that ensure that new credit is sustainable credit.  The last thing that people need is a mortgage that has a high likelihood of ending up in default. The Urban Institute acknowledges this point, but it can get lost in the political fight over the future of housing finance.

Policy folk also need to better understand how homeownership helps households build wealth, particularly given the rapid changes in the mortgage market. If households can readily access the equity in their homes through home equity loans, homeownership’s wealth-building function becomes more of a consumption spreading one.  That is, if homeowners access equity in the present in order to supplement current income, they will not be building wealth over the long term.

The robust Consumer Financial Protection Bureau should protect consumers from predatory attempts to get them to refinance, but people may not protect their future selves from their current desires. This may just be the way it goes, but we should not make claims about wealth building until we know more about how homeownership in the 21st century actually promotes it.

Foreclosure Mitigation Counseling Works

Posted on by

The Urban Institute published a study, National Foreclosure Mitigation Counseling Program Evaluation Final Report, Rounds 3 Through 5, that it prepared for NeighborWorks® America. The executive summary notes that

The National Foreclosure Mitigation Counseling (NFMC) program is a special federal appropriation, administered by NeighborWorks® America (NeighborWorks), designed to support a rapid expansion of foreclosure intervention counseling in response to the nationwide foreclosure crisis. The NFMC program seeks to help homeowners facing foreclosure by providing them with much-needed foreclosure prevention and loss mitigation counseling. The objective of the counseling services provided to clients is to determine the most appropriate solution, given a client’s circumstances and aid them in obtaining this solution. NeighborWorks distributes funds to competitively selected Grantee organizations, which in turn provide counseling, either directly or through Subgrantee organizations. (v)

The Urban Institute found that households counseled through NFMC were nearly 3 times more likely to have received a loan modification than non-counseled households. The authors estimate that “nearly two-thirds of the 151,000 loan modifications that NFMC clients received after entry into counseling would not have happened at all without the assistance of their counselor.” (vii)

On the one hand, these are very significant results and seem to validate this approach to foreclosure mitigation counseling. On the other hand, there is a lot of literature that calls into question the efficacy of various forms of financial counseling. It is important that this study be peer reviewed to ensure that its methods and conclusions are valid. If it holds up, it is equally important that we determine why this approach is so much more effective than many others.