The Budgetary Impact on Housing Finance

slide by MIT Golub

The MIT Golub Center for Finance and Policy has posted some interesting infographics on The President’s 2019 Budget: Proposals Affecting Credit, Insurance and Financial Regulators:

The White House released the President’s budget proposal for fiscal year 2019 on February 12, just days after President Trump signed a bill extending spending caps for military and domestic spending and suspending the debt ceiling. While the new law has already established government-wide tax and spending levels for the coming fiscal year, the specific proposals contained in the budget request reflect Administration priorities and may still be considered by the Congress. Here, we consider how such proposals may affect the Federal Government in its role as a lender, insurer, and financial regulator.

Between its lending and insurance balances, it is apparent that the U.S. Government has more assets and insured obligations than the five largest bank holding companies combined.

Through various agencies, the US government is deeply involved in the extension of credit and the provision of insurance. It also plays an active regulatory and oversight role in the financial marketplace. While individual credit and insurance programs serve different target populations, they collectively reach into the lives of most Americans, from homeowners to small business owners to bank account holders and students. Note that this graphic does not reflect social insurance, such as Social Security and Medicare/Medicaid.

I was particularly interested, of course, in the slides that focused on housing finance, but I found this one slide about all federal loans outstanding to be eye-opening:

The overall amount is huge, $4.34 trillion, and housing finance’s share is also huge, well over half of that amount.

As we slowly proceed down the path to housing finance reform, we should try to determine a principled way to evaluate just how big of a role the federal government needs to have in the housing finance market in order to serve the broad swath of American households. Personally, I think there is a lot of room for private investors to take on more credit risk so long as underserved markets are addressed and consumers are protected.

The “Humbled” Consumer Financial Protection Bureau

photo by Lilla Frerichs

The Consumer Financial Protection Bureau is changing directions in a big way under the leadership of Mick Mulvaney as seen in its Strategic Plan for FY 2018-2022. In his opening message to the Plan, Mulvaney writes that the Plan

presents an opportunity to explain to the public how the Bureau intends to fulfill its statutory duties consistent with the strategic vision of its new leadership. In reviewing the draft Strategic Plan released by the Bureau in October 2017, it became clear to me that the Bureau needed a more coherent strategic direction. If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes. I have resolved that this will not happen at the Bureau.

So how do we refocus the Bureau’s efforts to better protect consumers? How do we succinctly define the Bureau’s unique mission, goals, and objectives? Fortunately, the necessary tools are already set forth in statute. We have drawn the strategic plan’s mission statement directly from Sections 1011 and 1013 of the Dodd-Frank Act: “to regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws” and “to educate and empower consumers to make better informed financial decisions.” We have similarly drawn the strategic plan’s first two strategic goals and its five strategic objectives from Section 1021 of the Dodd-Frank Act. By hewing to the statute, this Strategic Plan provides the Bureau a ready roadmap, a touchstone with a fixed meaning that should serve as a bulwark against the misuse of our unparalleled powers. Just as important, it provides clarity and certainty to market participants. (2)

The subtext of this change in direction is not that “sub” at all. The Trump Administration wants to rein in the Bureau after it aggressively pursued financial services companies for violating a broad range of consumer protection statutes.

The Plan says that the Bureau will now act “with humility and moderation.” What that means is that the it will now be cutting financial services firms a lot of slack. Let’s see how a humbled Bureau works out for consumers.

People’s Credit Union v. Trump

photo by Janine and Jim Eden

Twenty-one consumer finance regulation scholars (including yours truly) filed an amicus brief in Lower East Side People’s Federal Credit Union v. Trump, No. 1:17-cv-09536 (SDNY Dec. 14, 2017). The Summary of the Argument reads as follows:

The orderly succession of the leadership of regulatory agencies is a hallmark of American democracy. Regulated entities, such as Plaintiff Lower East Side People’s Federal Credit Union (LESPFCU) rely on there being absolute clarity regarding who is duly authorized to exercise regulatory authority over them. Without such clarity, regulated entities cannot be certain if agency actions, including the promulgation or repeal of rules and informal regulatory guidance, are actual agency policy or mere ultra vires actions.

This case involves a controversy over who lawfully serves as the Acting Director of the Consumer Financial Protection Bureau (CFPB or the Bureau) following the resignation of the Bureau’s first Senate-confirmed Director. The statute that created the CFPB, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), is clear: the Deputy Director of the CFPB “shall . . . serve as acting Director in the absence or unavailability of the Director.” 12 U.S.C. § 5491(b)(5)(B). Thus, upon the resignation of the Director, the CFPB’s Deputy Director, Leandra English, became Acting Director and may serve in that role until a new Director has either been confirmed by the Senate or been recess appointed.

Despite the Dodd-Frank Act’s clear statutory directive, Defendant Donald J. Trump declined to follow either of the routes constitutionally permitted to him for appointing a Director for the Bureau. Instead, Defendant Trump opted to illegally seize power at the CFPB by naming the current Director of Office of Management and Budget (OMB), Defendant John Michael Mulvaney, as Acting CFPB Director. Defendants claim this appointment is authorized by the Federal Vacancies Reform Act of 1998 (FVRA), 5 U.S.C. § 3345(a).

As scholars of financial regulation, we believe that Deputy Director English’s is the rightful Acting Director of the CPFB for a simple reason: the only applicable statute to the succession question is the Dodd-Frank Act. In the Dodd-Frank Act, Congress expressly provided for a mandatory line of succession for the position of CFPB Director, stating that the Deputy Director “shall” serve as the Acting Director in the event of a vacancy. Congress selected this provision after considering and rejecting the FVRA during the drafting of the Dodd-Frank Act, and Congress’s selection of this succession provision is an integral part of its design of the CFPB as an agency with unique independence and protection from policy control by the White House. The appointment of any White House official, but especially of the OMB Director as Acting CFPB Director is repugnant to the statutory design of the CFPB as an independent agency.

The FVRA has no application to the position of CFPB Director. By its own terms, the FVRA is inapplicable as it yields to subsequently enacted statutes with express mandatory provisions for filling vacancies at federal agencies. This is apparent from the text of the FVRA, from the FVRA’s legislative history, and from the need to comport with the basic constitutional principle that a law passed by an earlier Congress cannot bind a subsequent Congress. Moreover, the FVRA does not apply to “any member who is appointed by the President, by and with the advice and consent of the Senate to any” independent agencies with a multi-member board. 5 U.S.C. § 3349c(1). The CFPB Director is such a “member,” because the CFPB Director also serves as a member of a separate multi-member independent agency: the Board of Directors of the Federal Deposit Insurance Corporation (FDIC).

Plaintiff LESPFCU is seeking a preliminary injunction against acts by Defendants Mulvaney and Trump to illegally seize control of the CFPB, and it should be granted. As will be shown, LESPFCU has a high likelihood of success on the merits given the strength of its statutory arguments that the Dodd-Frank Act controls the CFPB Directorship succession. Unless the Court grants LESPFCU’s request for a preliminary injunction, LESPFCU will suffer irreparable harm because it will be subjected to regulation by a CFPB that would be under the direct political control by the White House that Congress took pains to forbid. Moreover, without a preliminary injunction, Defendant Mulvaney will continue to take actions that may place LESPFCU at a competitive disadvantage by creating an uneven regulatory playing field that favors certain types of institutions. See, e.g., Jessica Silver-Greenberg & Stacy Cowley, Consumer Bureau’s New Leader Steers a Sudden Reversal, N.Y.TIMES, Dec. 5, 2017. Nor will the President’s rights be in any way limited by such a preliminary injunction: the President remains able to seek Senate confirmation of a nominee for CFPB Director. All the President is being asked to do is fish or cut bait and proceed through normal constitutional order. The granting of a preliminary injunction is also very much in the public interest as it enables the controversy over the rightful claim to the CFPB Directorship to be resolved through an impartial court and not through a naked grab of power by the President.

Obamas Buy Their Rental

2011 portrait by Pete Souza of the Obama family

Realtor.com quoted me in Former President Obama Finally Buys the DC Home He’s Renting: 6 Smart Reasons Why. It reads, in part,

Former President Barack Obama has decided that buying beats renting. The former first family have surprised many by purchasing the Washington, DC, house they’ve been leasing and living in since January, coughing up $8.1 million to call the place their own.

After vacating the White House, the Obamas had moved into the 6,441-square-foot, nine-bedroom, 8.5-bath mansion, located at 2446 Belmont Road NW in the tony neighborhood of Kalorama. The neighborhood has since become the place for the new political elite, with Jared Kushner and Ivanka Trump moving into a luxe rental a couple of blocks away, and Secretary of State Rex Tillerson snapping up a $5.6 million Colonial Revival down the street.

The reason the Obamas decided to stick around DC in the first place was so their younger daughter, Sasha, then a freshman at posh Sidwell Friends, could finish up high school there. With only three years to go, renting seemed to make sense so that the Obamas could easily pick up and move once she’s done.

But apparently, there’s been a big change of heart. Why?

On its surface, their decision seems a bit puzzling, given Sasha now has only twoand-a-half years to go. In real estate, the general rule is that it makes sense to buy a home only if you plan to stay put for five years, because this allows time for your house to appreciate, which helps you recoup hefty closing costs.

“People who sell after a year or two of ownership will often find that they have lost money on their purchase,” explains David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Nonetheless, real estate agents and other experts we spoke to say there could be plenty of reasons it’s smarter for the Obamas to buy rather than rent, even for this short span of time. Here are a few possibilities to ponder.

Reason No. 1: They’re making a commitment to DC

As presidential spokesman Kevin Lewis explained in a statement, “Given that President and Mrs. Obama will be in Washington for at least another two and a half years, it made sense for them to buy a home rather than continuing to rent property.”

Granted, you can read a whole lot into that “at least” if you want. After all, as Atlanta Realtor® Bruce Ailion explains, “Many buyers think they will only be in a property for two to three years and end up living there three to seven years. That is common.”

And it might be an indicator that our former commander in chief isn’t ready to shed the political life quite yet.

“Perhaps they want to keep a foothold in Washington, DC, for other reasons with regard to political advocacy and involvement,” says Florida Realtor Cara Ameer.

Reason No. 2: In certain markets, 2.5 years is long enough to make a profit

While 2.5 years might not be long enough to profit on a home in general, that rule varies widely by neighborhood, based on rent levels, home prices—and how quickly both are going up. And this is one hot neighborhood.

It isn’t known exactly what the Obamas were paying in monthly rent, but estimates hover at around $22,000. It’s entirely possible that the former first couple did the math and determined that buying made far more financial sense, and that mortgage payments would be less of a monthly nut. (To find out what’s best for you, you can crunch the numbers in an online rent vs. buy calculator.)

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Reason No. 5: This home will sell for a premium—he’s a former president, after all!

“It was always a little perplexing why the Obamas would ever rent if they planned to stay for anything longer than a year,” contends Washington, DC, real estate agent Rachel Valentino.

Her reason: “While they’re buying at market value, they can eventually financially benefit on the back end, where a buyer will pay significantly more for the celebrity factor. We aren’t Southern California, where every house has that star appeal. So, I can only imagine what a buyer will eventually pay to own a piece of history.”

Reason No. 6: Profits aren’t everything

“One lesson we can draw from this story is that buying a home should not always be seen as a financial transaction,” says Reiss. “Sometimes we buy a home because it’s best for our family at a particular time. Sometimes we buy a home because we fall in love with it. And sometimes those are the best reasons of all to buy a home, profits be damned.”

Patenaude To Help Lead HUD

photo: J. Ronald Terwilliger Foundation for Housing America’s Families

Pamela Hughes Patenaude

Realtor.com quoted me in ‘Ultimate Housing Insider’: Pam Patenaude Nominated as HUD Deputy Secretary. It reads,

Pam Patenaude was nominated by President Donald Trump to become deputy secretary of Housing and Urban Development, according to a White House statement released on Friday. The move has been met with resounding applause by industry insiders who think her background could serve as the perfect complement to HUD Secretary Ben Carson, who entered his role without experience in housing or government.

Patenaude, currently president of the J. Ronald Terwilliger Foundation for America’s Families, was formerly an assistant secretary for community, planning, and development at HUD, under President George W. Bush. She also served as director of housing policy at the Bipartisan Policy Center’s Housing Commission. Patenaude’s nomination must be confirmed by the Senate.

“She’s the ultimate housing insider,” says David Reiss, research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School. “She’s connected and has a lot of respect within the housing field.”

Real estate industry organizations hailed the choice, including the National Association of Realtors®. In a statement, NAR President William E. Brown said, “Pam’s extensive and strong background in real estate and housing will be an asset. … Pam is an ideal candidate for the position; she understands the issues that impact the industry.”

David Stevens, president and CEO of the Mortgage Bankers Association, also offered his thumbs-up.

“Pam is an exceptional choice for the position,” Stevens said in a statement. “Personally, I have worked with her for a number of years and she is exactly the kind of leader who will help support the secretary and also address the critical issues ahead for HUD. She has a well-informed understanding of the agency, and essential technical knowledge of the real-estate finance industry. I would encourage the Senate to move swiftly in confirming her nomination.”

This depth of experience, Reiss says, serves as the perfect foil for Carson. As HUD secretary, Carson serves as the public face of this department, while Patenaude will handle the daily duties of running the organization.

“The big criticism of Carson is that he has no experience or background in housing,” Reiss continues. “So to have a No. 2 who’s really responsible for the day-to-day responsibility of the agency is a plus.”

What Patenaude’s appointment could mean for housing

In November, rumors were swirling that the Trump administration was considering Patenaude as HUD secretary, but then Carson got the nod instead, and then the Trump administration released a budget calling for $6 billion in cuts to the department. Patenaude’s nomination has many hopeful that HUD’s core initiatives—like affordable housing—will remain a priority.

“Trump’s ‘skinny budget’ decimated HUD,” Reiss continues. “Trump has made lots of appointments who’ve expressly said they want to destroy the agencies that they’re running. But Patenaude is an insider with HUD. So my hope is she sees the value it provides, and be an advocate for many HUD programs.”

Trump, Homelessness and the General Welfare

photo by Jay Black

The Hill published my column, Trump’s Budget Proposal Is Bad News for Housing Across the Nation. It opens,

The White House unveiled its much anticipated budget proposal today. It shows deep cuts to important agencies, including a more than $6 billion decrease in funding to the U.S Department of Housing and Urban Development (HUD). More than 75 percent of the agency’s budget goes to helping families pay their rent. Thus, these cuts would have a negative impact on thousands upon thousands of poor and working class households.

Many years ago, Congress enshrined the “goal of a decent home and a suitable living environment for every American family” within its Declaration of National Housing Policy. This goal was not just justified by the basic needs of those with inadequate housing, but also because “the general welfare and security of the nation” required it. As our nation’s leading cities grapple with rapidly growing homeless populations, this additional justification takes on added weight today.

Click here to read the rest of it.