Category Archives: Housing and housing finance

Kevin Erdmann Revisits the Housing Boom

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He writes,

the commonly repeated anecdotes of janitors and checkout clerks being
handed $300,000 mortgages on a hope and a prayer do not appear to be representative. On net, all the new mortgages went to families with incomes around $45,000 and higher.

And elsewhere he writes,

growth in homeownership came from high income households and that households didn’t increase their debt payment/income ratios or their relative consumption of housing during the boom. The evidence against the standard narrative is even more stark when we look at dollar levels, because, despite frequent implications to the contrary, low income households don’t tend to take on nearly as much debt as high income households.

Consider two ratios:

1. Debt-to-income.

2. Debt-to-equity.

Many narratives of the financial crisis focus on debt-to-income ratios. The oppressor-oppressed narrative is that greedy lenders imposed inappropriately high debt-to-income ratios on innocent borrowers, who then could not meet their mortgage payments. The civilization-barbarism narratives stress the use of houses as ATMs and the forced expansion of lending toward irresponsible borrowers.

It seems to me that Erdmann is suggesting that debt-to-income ratios did not got out of line, or perhaps they only got out of line for high-income borrowers. He may be right, although I would suggest looking at the Home Mortgage Disclosure Act (HMDA) data and not just the survey of consumer finances.

Ever since Bob Van Order explained the mortgage default option to me almost 30 years ago, I have viewed debt-to-equity as more important than debt-to-income. If we define sup-prime lending in terms of debt-to-income, then I am inclined not to attach much significance to the proportion of sub-prime loans. To me, the dangerous loans are the ones with low down payments. There is some overlap between those and loans with high debt-to-income ratios, but not enough overlap to equate the two.

Let’s take Erdmann’s analysis of debt and income as accurate. I see no reason to change my preferred narrative of mortgage lending and the housing boom. That is, there was a surge in lending with low down payments. I am pretty confident that the HMDA data support this. In addition, there was a surge of lending for non-owner-occupied homes (speculators).

Think of owner-occupants with low down payments and non-owner-occupants as the speculative component in the housing market. My narrative is that the speculative component soared during the housing boom. These speculators did very well until house prices started to level off late in 2006. Then what had been a virtuous cycle on the way up turned into a vicious cycle on the way down, and the speculative buyers got hammered.

Getting from that to a recession is the more difficult part for me, because I do not allow myself to use the words “aggregate demand.” Instead, to explain the recession I have to make a case that many patterns of specialization and trade became unsustainable, or were finally perceived as unsustainable, while new sustainable patterns were difficult to discover. I might argue that the surge in government economic intervention exacerbated the difficulty of discovering new patterns of sustainable specialization and trade. TARP and the stimulus were largely efforts at redistribution, and that gave people a bigger incentive to focus on grabbing some of the loot than on developing a sustainable new business. Of course, Keynesians will tell you that the problem is that the surge in government intervention should have been bigger and lasted longer.

PG County Foreclosure Story Focuses on the N-word

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This WaPo story is long, but nonetheless incomplete.

Using court and land records, The Post analyzed 173 home purchases in Fairwood that wound up in foreclosure between 2006 and 2008.

In 43 of those home purchases, borrowers financed 100 percent of the cost of the home with loans that had high interest rates and reset periods within three years. The loans were of the type that Angelo Mozilo, the CEO of defunct subprime lending powerhouse Countrywide Financial, had called “toxic” because they offered such onerous terms. He warned his own company in internal e-mails that the loans were “the most dangerous product in existence.”

Nearly all the remaining loans The Post examined contained features associated with high default rates, such as low or no down payments, interest-only payment periods and higher rates than prime loans.

Only seven out of the 173 defaulters received the most favorable lending terms, known as conventional 30-year fixed interest rate loans. These “prime” loans are the least likely to fail, experts agree.

The neighborhood is described as primarily African-American, with a median income over $170,000.

Some questions that I have:

1. Why were so many loans made with zero down payment? If the median family income is that high, should there not have been higher down payments?

2. If the borrowers put nothing down to begin with, then foreclosure cost them nothing in terms of lost equity. Presumably, if they were affluent before, they are still affluent now. If not, why not?

3. Did anyone benefit from making these loans? The companies that ended up owning the mortgages took huge losses (taxpayers also may have been involved in some way, through bailouts). Companies that originated subprime loans but did not hold them (the “originate to distribute model”) picked up some small fees, but my guess is that they competed away a lot of profits by incurring marketing costs, and in any case enough of them went out of business that you can hardly envy their franchises.

4. When did borrowers start to fall behind on their payments? If it was within a year of buying the home, then you can be sure that even if the borrowers had gotten prime, thirty-year fixed rate loans they still would have defaulted.

Remember, it was the WaPo that said on January 1st that “narrative” is “out” and “facts” are “in.” Their story is instead all about narrative (the N-word, as I call it), and I think it could use more facts.

Peter Wallison and the N-word

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He says,

By 2008, before the financial crisis, there were 55 million mortgages in the US. Of these, 31 million were subprime or otherwise risky. And of this 31 million, 76 % were on the books of government agencies, primarily Fannie and Freddie. This shows where the demand for these mortgages actually came from, and it wasn’t the private sector. When the great housing bubble (also created by the government policies) began to deflate in 2007 and 2008, these weak mortgages defaulted in unprecedented numbers, causing the insolvency of Fannie and Freddie, the weakening of banks and other financial institutions, and ultimately the financial crisis.

Remember what the Washington Post Style section proclaimed on January 1st. Narrative is out. Facts are in.

Of course, in addition to the Freddie and Fannie securities, there were lots of private-sector securities backed by risky mortgages. My contention is that this boom was fueled by risk-based capital rules, which stated that once these loans were packaged into securities, divided into tranches, and blessed by rating agencies as AAA, banks could earn three times the return on such mortgages as could be earned by originating and holding an old-fashioned, low-risk mortgage.

How to Make Manhattan More Dense

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Shlomo Angel and Patrick Lamson-Hall write,

densities in today’s Manhattan can increase again if we allowed its lower income residents—and lower income, given today’s housing prices, includes its middle income residents as well—to live in more cramped quarters and to consume less floor space per person. As long as public authorities can maintain acceptable elementary standards of health and safety—from access to water and sanitation, to proper ventilation and fire protection—there is no reason to restrict the housing options of lower income residents by mandating a minimum consumption of floor space. A contemporary densification policy may thus entail the removal of zoning and building standards that require minimum apartment sizes, allowing for the construction of micro apartments as well as single rooms sharing common facilities (formerly known as SROs, Single Room Occupancies). It may entail extending legal permission to subdivide larger apartments into smaller ones by furnishing them with additional kitchens and bathrooms. And it may also entail the passage of new regulations that eliminate the exclusionary restrictions now imposed by the boards of cooperatives and condominium associations on the leasing of apartments that are left empty to non-owners, as well as the prohibitions on the rental of rooms on a short or longer term basis.

Most interesting was their demonstration that Manhattan density peaked in 1910, then fell through 1980. Think of the elevator as increasing effective floor space and the subway as reducing the demand for housing right near factories.

Now is a Great Time to Subsidize the Housing Market!

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From the WaPo.

The White House announced Wednesday that the Federal Housing Administration will significantly lower the fees it charges borrowers, a move designed to save individual home buyers hundreds of dollars annually and help jump-start the housing market.

It’s always a great time to buy a home–just ask a Realtor™. Similarly, it is always good public policy to jump-start the housing market–just ask anyone in the housing lobby.

One of the best times to jump-start the housing market was the early 2000s. If you need to be reminded of that, attend this event featuring Peter Wallison. Recently, I reviewed his latest book.

Mortgage Servicers Bite Back

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Laurie Goodman writes,

Average foreclosure timelines, or the length of time between the first missed payment on a loan to its liquidation, have continued to increase, particularly in judicial foreclosure states, where a court order is required to evict a borrower. This increase reflects a number of factors: borrowers are being given more opportunities to stay in their home through mortgage modifications, state attorneys general have imposed various foreclosure moratoriums to increase consumer protections, and courts are backlogged.

Pointer from WSJ’s Joe Light.

A mortgage servicer is a company that operates in a specialized niche in the securitization process. The loan originator approves the loan, which is sold to a securitizer, who packages the loan and sells it to investors. But once the loan is originated, none of those folks actually want to have any contact with the borrower. That task falls on the loan servicer, who takes your monthly payments and distributes them to where they need to go–taxes, insurance, and payments to the securitizers, who pass them through to investors. The servicer also deals with you when you become delinquent, and if appropriate, takes you to foreclusre. Servicing has been traditionally a very low-margin business, with the whole ballgame about keeping costs low.

Back in 2009, policy makers treated mortgage servicers like a piñata. They beat on servicers to provide foreclosure relief, loan modifications, and so forth. They told them to administer new programs that combined loan origination procedures with loan servicing procedures. They sought to punish servicers for noncompliance.

Well, guess what. Now servicers do not want anything to do with any loan that might become delinquent. The cost of dealing with such loans has skyrocketed, thanks to Washington’s piñata-bashing. So if you originate a loan to someone with a low credit score, the servicer charges a hefty premium. That in turn means that risky borrowers either have to pay that premium or get rationed out of the market altogether.

And so now policy makers are beating up on originators to be nicer to risky borrowers. It really is like something out of Atlas Shrugged.

I could see all of this coming back in 2010. When I testified on HAMP (I start about 90 minutes in), I was the only one who focused on the plight of mortgage servicers.

What Do We Really Know About the Cost of Living?

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In an article on consumers’ expectations for home prices, Robert Shiller writes,

with the median home price under $200,000, according to RealtyTrac…

Pointer from Mark Thoma.

My question is: Where are these homes that are priced at less than $200,000? My niece in LA, my daughter in DC, another daughter in NY, and my third daughter in Boston would sure like to know.

This gets back to the issue of widening differences in income and housing costs within and across metro areas. I mentioned that issue last month, when I cited Joel Kotkin’s finding that much of the population growth in recent years has been in the far suburbs.

Suppose that housing cost is 25 percent of income, and suppose that close to the center of a city housing cost is 5 times what it is in the outer suburbs. That means that the cost of living is 1.25 times as high close in as it is far out. Yes, you should adjust for commuting time and cost, the value of different amenities, and so on. But that is a huge difference.

Consider that, at a national level, economic experts soberly analyze changes in trend productivity growth of 0.5 percent per year. To measure productivity changes, you need to have accurate measures of real GDP. To measure real GDP, you need to have accurate measures of “the” rate of inflation.

But what if inflation is 5 percent higher in downtown LA than it is 30 miles away? Which is the accurate measure of inflation? Even a slight mistake in aggregating across different areas could completely change the picture for national productivity growth.

I find myself thinking that the multiplicity of economies within the U.S. really matters. For example, I could imagine that the minimum wage would have a much bigger effect on employment in the locations with those sub-$200,000 houses than in higher-cost areas, where employers probably have to pay above the minimum, anyway. I can imagine that downward stickiness of wages matters a lot if you have inflation differentials across areas of 5 percent or so.

In trying to view the U.S. economy, I am tempted to drop the macroeconomic lens and replace it with the international trade lens.

My Review of Peter Wallison’s Forthcoming Book

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is here.

Wallison’s thesis is that policymakers in Washington underestimated the significance of the surge in nontraditional mortgages. What is perhaps even more deplorable is the way that these mortgages continue to be downplayed in the mainstream narratives of the crisis and in the policy responses that followed.

Meanwhile, CNN Money reports on programs that offer 3 percent down payments.

The new loans will only be doled out to those who buy private mortgage insurance, have a credit score of at least 620 and offer complete documentation of their income, assets and job status. And, to further mitigate risk, the agencies will require borrowers to receive home ownership counseling.

Once again, the government is pushing home borrowership, setting households up to fail and making the housing market more speculative. Of course, when the stuff hits the fan, the government officials involved will blame lenders, not themselves.

Ryan Avent on Urban Housing Supply

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He writes,

Housing is more costly in the most expensive cities because so little of it is built. In the 2000s, Houston’s housing stock grew by more than 25 percent while that in the Bay Area grew just over 5 percent. In 2013 Houston approved 51,000 new homes while San Jose okayed fewer than 8,000, despite the booming Silicon Valley economy. Glaeser and Kristina Tobio find that since the 1980s, the extraordinarily rapid growth in the population of Sunbelt cities is due primarily to the receptiveness of those cities to new construction. A strengthening economy in places like Texas and Georgia leads to a construction boom and rapid population growth, while economic booms in coastal cities lead to very little population growth but soaring housing costs.

More Q where construction is allowed, higher P where it is not. Read the whole thing.

A Great Time to Rent

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Nick Timiraos writes,

Multifamily construction is now higher than it was during the peak in the previous housing cycle, reached in 2006. But back then, far more of these units were being built as condominiums, not as rentals.

Policy makers see young people reluctant to buy homes, and they respond in the usual way, by proposing government-subsidized lenient mortgage credit. Meanwhile, entrepreneurs respond by building more apartments.