Liveblog
Correspondents Duncan Black (Eschaton), Brentin Mock (The American Prospect), Reihan Salam (The Atlantic), Ryan Avent (Grist), Harry Moroz and John Petro (Drum Major Institute) and Diana Lind (Next American City) bring you live updates from the A Crisis is a Terrible Thing to Waste: Transforming America’s Housing Policy conference.
Conference presented by the Furman Center for Real Estate and Urban Policy, the MacArthur Foundation and the Rockefeller Foundation.
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NYC to suburbs: renters don’t have cooties | Feb 13th at 4:26pm
To be honest, this is the panel I’ve been waiting for the entire conference (not only is rental housing one of my main research areas, I’m a renter myself and live in a city dominated by renters). That said, I’m a little disappointed that the opening paper was so narrowly focused on Section 8 and LIHTC. Most poor renters don’t live in subsidized housing, so why do we so often frame the rental housing debate about a few programs?
Kudos to Bart Harvey and Carol Galante for pointing out that we need new and different types of policy interventions, to be able to site LIHTC (or non-subsidized rental housing, for that matter) in low-poverty neighborhoods. I’m by no means convinced that inclusionary zoning is the best tool for this, but there’s only so far we can go with either vouchers or LIHTC if suburban zoning makes it impractical to use them in desirable areas. Tying this back to Ed Glaeser’s comments about restrictive zoning at the opening session yesterday, I would have liked to see more discussion about what kind of zoning reform would be politically feasible. That probably doesn’t qualify as low-hanging fruit, but it’s still worth exploring.
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I love education, but… | Feb 13th at 3:11pm
As always in conversations about the financial crisis, this panel has talked quite a bit about financial literacy education.
I love education and I think everybody should understand the terms of their mortgage, but calling financial literacy education a savior of the financial system is smoke and mirrors.
Indeed, in the past year, one of the federal government’s most apparent foreclosure mitigation techniques has been…financial literacy initiatives. President Bush appointed the President’s Advisory Council on Financial Literacy way back in February of last year and created a 1-800 number that homeowners could call for financial advice. Congress stuck financial education initiatives into two major pieces of legislation (legislation reauthorizing the higher ed act and housing legislation).
First, financial literacy education just doesn’t work that well (just see the past results of the financial education survey of the Jump$tart Coalition for Personal Financial Literacy). Second, there are powerful forces at work that make acting against your better financial judgment just plain difficult.
Robert Schiller has proposed a bit more intimate measure: a subsidized personal financial advisor with a fiduciary duty to look after a homeowner’s best interest, as Ryan notes below. This sounds like a more effective way to “smarten up” homeowners, but let’s not let the financial literacy education conversation go to far – it’s no response to our current financial woes.
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You’re more likely to be struck by falling home prices than by lightning | Feb 13th at 3:10pm
Chris Joye pointed out that recent events have shown us that “a single-family home is a phenomenally risky investment.” This certainly isn’t a new idea – economists have for years pointed out that putting all your eggs into the single basket of your home, rather than diversifying across markets (as we do with our equity investments by choosing mutual funds rather than individual stocks), exposes you to enormous risk. But it’s a little hard to convince potential homebuyers of that, especially with a message from the federal government (among others) that purchasing a home is the American dream. Buying a home is often encouraged as a means of insulating against risk – owners don’t have to worry about landlords raising their rent or evicting them (or turning co-op, in New York). And homeownership is a means of forced savings, leading to the accumulation of a nest egg for retirement – as long as the value of the home increase, of course.
But, as Raphael Bostic just mentioned, we know from behavioral economics that people are not very good at estimating risks. We tend to overestimate the likelihood of being attacked by a shark, for instance, while greatly underestimating the probability of more familiar problems, like being hit by a car. So although in theory homebuyers know that their house might drop in value, they tend to believe that it won’t happen to them (that’s probably not true for residents of Detroit).
So it seems that voluntary policies that depend on homebuyers’ accurate perception of risk (such as buying equity insurance) are unlikely to solve the problem.
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A Spectrum of Mortgage Solutions | Feb 13th at 2:50pm
To oversimplify (which unfortunately follows in the style and substance of David Brooks’ column today), there seems to be two ways to go with offering consumer better mortgages choices: more complex or constraining people’s choices. Is the matter of fixing the mortgage market a matter of managing risk better, as Robert Shiller suggests by having mortgage payments adjust as a home changes in value over time and as household income changes or by subsidizing financial education? Or is it a matter of making it harder to overleverage homes (as Ryan Avent has noted) by banning low down payment mortgages or defaulting people into 30-year fixed-rate mortgages?
I don’t want to offer this as a false choice between the two, but that’s how the discussion seems to have broken down so far. But there is a lot of sub rosa debate here about whether the findings of .(JavaScript must be enabled to view this email address) suggest we should limit people’s choices or offer them “better” choices.
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Things Get Complicated | Feb 13th at 2:49pm
Using Ryan’s description of Shiller’s proposal as a starting place, I’d like to agree with the observations of panelist Raphael Bostic that what we need is less, not more, complexity in mortgage products and related. Rather than offering more and more complex insurance products to insure ourselves against specific additional sources of risk, I’d suggest that simply expanding the broader based safety net, including some form of affordable universal health care, would be a simpler and more sensible way to insure people against a variety adverse economic events for which there aren’t existing insurance markets.
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Save Them From Themselves | Feb 13th at 2:38pm
Robert Shiller notes that a broad theme which might apply to his policy recommendations is the idea that we should democratize finance—that is, we should make finance work for most Americans. As the panel proceeds, it seems as though this largely means helping to protect households from themselves. As was mentioned by Shiller, and as is now being discussed by Christopher Loye, homeownership is a very risky proposition. It is a highly leveraged investment involving a huge share of household resources in an undiversified and volatile asset, the performance of which is highly correlated with economic variables, like wages and unemployment, that influence ability to pay one’s mortgage. This risk sometimes makes homes lucrative assets for purchasers, but buyers also risk bankruptcy, as all too many Americans now realize.
So what does Shiller propose to address these issues? Basically, protections for buyers and would-be buyers. He proposes subsidized financial advice, for instance, to remove the advising role from real estate agents and mortgage brokers who really, really want to sell homes and loans. The idea being, of course, that households often need to be told not to borrow and buy, or at least not to borrow and buy so much.
He also advocates for the creation of things like metropolitan price indexes, housing futures markets and swaps, and other products—tools, basically, which can be used to provide crucial hedges against a declining housing market. There is very little a homeowner can do if the market turns against him or her, aside from selling into the downturn, which further destabilizes prices, or sitting tight while household equity evaporates. Given the stakes, these are pretty terrible options. By using metropolitan price indexes to provide financial products like home equity insurance, downswings can be made less painful for homeowners, and therefore more orderly and economically benign.
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Behavioral Economics | Feb 13th at 2:27pm
We’re in the home stretch of the conference at this point listening to the panel called Reclaiming the Promise of Homeownership: New Models to Help First-Time Homebuyers Achieve Stability and Build Wealth. Robert Shiller, a professor of economics at Yale, mentioned this issue of “behavioral economics.” Essentially, the behavioral aspect of economics is the line of thnking that allowed people to believe that housing prices were going to keep going up. How that happened—and how come we didn’t have checks in place—Shiller hasn’t yet explained.
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Who is the Department of Jobs? | Feb 13th at 12:04pm
Who is the Department of Jobs?
Maybe I’m on the outside looking in as an economic development policy guy here, but the lack of connection between community development/housing policy and jobs here is really noticeable. The links between education and housing got a whole panel, a HUD secretary pre-announced a major sustainability initiative, and housing-related investment policy was the subject of two panels. To be totally clear- this is not a criticism of my colleagues at the Furman Center who organized this amazing conference, but rather my reflection on the lack of connection between jobs and community development generally.
Is HUD a housing agency or an urban development agency? Historic HUD-related programs, like the Model Cities program that came up yesterday, used to be fairly job-focused before the Reagan cuts of urban programs. If creating well-paying jobs is not in HUD’s purview, who is responsible for ensuring that a green-collar job revolution happens? Commerce? Labor? Energy? EPA? This mission falls outside all of these agencies’ core missions.
I’m not arguing for a new federal agency, but the tight connections between fair housing, zoning, and jobs are missing in the housing policy discussion.
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Out of Service | Feb 13th at 11:47am
This last panel of financial professionals and academics was quite fascinating, though peppered with such delightful turns of phrase (from the financial professionals) as “we were allowed to do it” and “we have to have the will to change”.
The panel emphasized just how complex securitization of mortgages is and touched briefly on the uglier side of foreclosure mitigation: servicer (dis)incentives to modify. Lewis Ranieri, Chairman of Ranieri Partners, dropped a bombshell that I wasn’t prepared for. He claimed that servicers make more money in foreclosure than in restructuring (though Austan Goolsbee noted that as housing prices decline, the cost-benefit shifts in the other direction). This is at odds with what we hear from politicians and housing advocates, but it’s certainly a possibility. Also, Ranieri said that servicers are really the only ones who can be a mortgage’s fiduciary and that, currently, they have too many masters.
These latter points are at the heart of an amendment to the stimulus package (included in the Senate version without funding, but not in the conference report as far as I can tell) proposed by Mel Martinez, Republican of Florida. He proposed government payments to servicers who evaluate and modify mortgages that will likely end in foreclosure and, crucially, provides legal “safe harbor” to servicers from grumbling investors. This provides servicers an additional incentive to modify (both monetary and legal) and resolves to some extent the “too many masters” problem. The rub, though, is that there are no affordability requirements so redefault is a serious concern. In that case, the government would essentially be paying servicers to delay foreclosure ( a similar concern arises with bankruptcy, but without the cost to government).
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Mortgage-Style Bubblenomics | Feb 13th at 11:45am
Should securitization continue to be basis of the American mortgage system? The background question to this panel that no one is talking about is whether widespread, systematic use of privately-originated mortgage-backed securities is better than having Fannie and Freddie dominate the market.
Peter Engberg Jensen, chief of a Danish bank, is describing the European mode of securitization, which requires taking on only people who have high downpayments, for originators to keep some “skin in the game” to make sure the security is fair to investors and to structure payments in a way that prices risk more effectively. I’m a little unclear if this system is required by the originating banks, by the investors or by law. The result is a much more stable system, but allows less investors to profit off of the mortgage market—potentially bad or potentially good, depending how you look at it.
Either way, the private model of originating mortgage backed securities in the U.S. will require a period of extended house price appreciation or at least some signs of health in the banking sector to get started again. Private money will only be attracted back when there is some sign that investors can make money out of housing again.
The model we have now is one where the government-sponsored enterprises (“GSEs” in banker and wonk speak)—Fannie and Freddie— are the major originators of mortgages. This is the situation we are likely to be in for the next year or more. This is good for people buying houses in downturns, when capital is scared away, but can crowd out needed private investment when the market is hot. The reality is that we will continue to need a mixed system- the GSEs will be the only players in downturns like this one, and private money will jump in the market when it’s hot. The question is how to manage the transitions between the two without suffering a major meltdown on the way down and without encouraging reckless speculation on the way up.
In a shameless plug, I’m looking forward to reading my friend Alyssa Katz’s book Our Lot: How Real Estate Came to Own Us, which describes how this balance got out of wack in the run-up to the crisis. One of the things she tells me the book describes is that the GSEs’ dominance of the prime mortgage market led private investors hungry for exposure to the mortgage market to seek out other ways to profit, which led them to subprime and jumbo (roughly mortgages over $400k) mortgages that the GSEs ostensibly couldn’t touch.
For those that haven’t heard it, my seat neighbor reminds me about the “Giant Pool of Money” episode of This American Life, which explains securitization and the mortgage meltdown in a way that is clear and engaging.
