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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Is That a Problem? | Feb 13th at 11:23am
Austan Goolsbee notes that if we required 80% loan-to-value for all mortgages, then we wouldn’t have any of these problems. But he adds that if you require all buyers to put 20% down, then you’re basically saying, here are a lot of people who can’t get houses now.
I can’t tell if he thinks that’s a bad thing, but my reaction is, so what? Housing investments, as we have learned in recent years, are risky investments. A home is a much different animal from, say, a mutual fund. Buy a mutual fund and you’re diversified, but you’re also not leveraged—you can’t end up losing more than you put in. That’s not the case with a home mortgage. Homeowners are very vulnerable to economic shocks, and I don’t think there’s anything wrong with limiting purchases to households who have enough cash on hand to make a 20% down-payment.
There is a sense in America that renting is a second-rate housing option, and our public policy reflects that. Given what our public policy hath wrought, we may need to conclude that for most people, including those who are well off, renting is often a pretty good decision.
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A Nobel Prize for Economics or Evil? | Feb 13th at 10:39am
This panel is great—it’s called After the Credit Freeze Thaws: Are Mortgage-Backed Securities the Best Way to Finance American Homeownership? That question hasn’t been answered yet. But Austan Goolsbee, staff director and chief economist of the president’s economic recovery advisory board, made a funny (?) joke that subprime mortgages were either worthy of a Nobel prize for economics — or just pure evil—since subprime loans are essentially loans to people who don’t pay their bills.
Peter Engberg Jensen, apparently the guy who first created mortgage-backed securities, contends that there’s nothing wrong with subprime loans. They have been around for decades. The problem is that subprime loans were used for house appreciation—or a trip to Las Vegas—that’s when you have a problem.
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Small Potatoes | Feb 13th at 10:21am
There was a surprisingly ample amount to think about in Shaun Donovan’s speech. One of the most interesting ideas, as one of my colleagues at DMI has pointed out, is that bankruptcy reform (permitting modification of mortgages on primary residences) is small potatoes compared to other foreclosure mitigation efforts. Though it’s a proposal that I’ve advocated, it seems like more of a political touchstone (liberals like it, conservatives hate it) than a likely “solution” to the housing crisis. Donovan called the provision a “safety net” and “not the model”. What Donovan made clear is that there will be policy responses on multiple levels (the two most basic being help to already distressed homeowners and assistance for those who will be distressed).
Donovan also approvingly mentioned the $8,000 tax credit for new home purchases by first-time homebuyers (now a real credit and not an interest-free loan) – or at least it was $8K the last time I checked – that is included in the stimulus package. Of course this was a bit of stimulus boosterism, but I just expected Donovan to leave the credit out. Given his other responses to the housing crisis - loan modifications, standards for modifications, targeted bankruptcy reform, measures to mitigate community impacts, capital for the purchase and refinance of existing mortgages – I don’t see how the $8K credit fits in. The credit might slightly increase home purchases – as Ed Glaeser has tackled – but its effects will be limited (that is, assuming that we want to artifically increase home prices, which I for one do not).
Finally, Donovan riffed briefly on Ralph Ellison’s classic Invisible Man. I’ve often thought about the book in relationship to the housing crisis. I wonder if anyone else has thoughts about how the book is relevant to the current times? (Or maybe housing people, which I am only part time, talk about the book all the time?)
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Donovan Makes News With Preview of Foreclosure Prevention Program | Feb 13th at 10:06am
It is amazing that a HUD Secretary is speaking like an advocate. Donovan is known in NYC for his championing of inclusionary zoning (or at least a unique local variant that he implemented here) and of guiding Mayor Bloomberg’s major investment in affordable housing. I’m not a 100% fan of his efforts, but he brought a needed change when he stepped into the role of Housing Commissioner here in NYC in 2004.
He laid out
threefive [thanks Duncan] major federal efforts that will be part of a forthcoming announcement by President Obama about a major initiative to prevent foreclosures, which is the most newsworthy thing (from a non-wonk perspective) that happened today:- Accelerating loan modifications (presumably by introducing a major policy “stick” that forces banks to the table)
- Setting and enforcing industry-wide standards for modifications (referencing the pitiful track record the private mortgage industry has done- 56% of mortgages modified by the private market are delinquent after 6 months)
- Targeted reform of bankruptcy laws (presumably forcing banks to write down the amount of housing debt people have to the now-much-lower value of the home, which would give delinquent borrowers a much stronger negotiating position modifications)
- Making sure capital is available for mortgages (which sounds to me like claiming TARP II as part of this)
- Mitigating the impacts of foreclosures by adding more funding to prevent rising family homelessness and getting people to move into foreclosed homes to prevent the spread of blight (an expansion of the current Neighborhood Stabilization Program)
This is where the major action in housing policy will be in the next few months.
But from a longer term perspective, the two most revolutionary things Donovan mentioned were “affirmatively” increasing access to “neighborhoods of choice” (the flipside of “high-poverty neighborhoods”) and using HUD’s portfolio and insurance programs for sustainability efforts. On increasing access to neighborhoods of choice, he emphasized removing zoning barriers to creating rental housing. Depending on the methods used, Ed Glaeser might do a backflip. The Apollo Alliance and Green for All may already be doing backflips over the jobs that the public housing and affordable housing rental housing energy retrofits would create.
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Chocolate Rations Are Up | Feb 13th at 9:47am
Over at the mother ship yesterday I wrote that it was refreshing to hear someone who actually sounded as if they had some idea what they were talking about. Listening to HUD Secretary Shaun Donovan I realize it’s something even more than that. During the Bush years, that administration was basically unwilling to acknowledge any problems in the domestic economy. We lived in Larry Kudlow-land, where the economy is always booming and everybody’s always getting rich. Bush’s one achievement of debatable merits was the increase in the homeownership rate which has now returned to its 2000 level. Otherwise, job growth was anemic and wages were stagnant. In normal times there are real problems which government can help address, and in crisis times there’s an even greater role.
Donovan did provide a broad outline of a supposedly soon-to-be-announced Obama comprehensive foreclosure response initiative. It will include measures to accelerate loan modifications, imposition of broad industry wide standards for loan modifications, bankruptcy reform, efforts to limit the impacts of foreclosures on communities, and measures to ensure capital is still available for mortgages.
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Prelude to a Crisis | Feb 13th at 9:47am
The next panel is a meaty one, on the structure of the mortgage products that helped to fuel a housing bubble and then turned the crash into a financial crisis. Moderator Joseph Tracey introduces the first speaker, Lewis Ranieri, as the inventor of the mortgage-backed security. Ranieri opens with the line, “Hi, I’m Dr. Frankenstein.”
Ranieri notes that MBS were created to help meet the increased expected demand for mortgage capital from the Baby Boomers. To make the securitization of loans work, financiers had to make the bonds “safe.” This meant getting a nice rating slapped on the MBS. It also meant convincing lenders, or purchasers of MBS, that they’d be paid back. These lenders were not in a position to know whether originators were doing an adequate enough job of “looking borrowers in the eye,” and determining whether they were a good credit risk. So, to reassure lenders, MBS took advantage of pooling (combining hundreds or thousands of mortgages together into a security), so that if some small percentage of borrowers defaulted, the MBS would still be ok. They also took advantage of government guarantees, and of the use of tranches (that is, breaking MBS up into riskier and less risky bundles) so that lenders could feel safe getting into the market.
The obvious stumbling block here is that nothing was done to ensure that originators would act in good faith. This set up a problem. Suddenly originators had access to new capital without an increased incentive to maintain high standards. This fundamentally changed the dynamic of mortgage markets and created a nationwide housing boom, which set the stage for epic failure; the vulnerability of MBS was that pooling wouldn’t work—that all housing markets and borrowers would suffer at once. That, of course, is exactly what happened.
It’s wild to listen to this, like listening to the designers of the Titanic. You want to yell, “But didn’t you think about icebergs?”
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Outside Agency | Feb 13th at 9:43am
I agree with Ryan, but I think the approving murmurs are more of a result of a hopeful confidence that HUD might be an active - and respected - federal agency, a distinct change from previous administrations (not just the last one).
To this end, I disagree with Donovan’s statement that (paraphrasing):
There is a crisis in confidence in whether the feds can make a difference in housing.
I don’t think that there is a crisis in confidence, but instead that most people look (perhaps as always) to cities for action on housing issues rather than to HUD. Donovan, though, definitely seems prepared to change this.
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Research and Evaluation | Feb 13th at 9:35am
I got to Shaun Donovan’s lecture a bit late. One of his last points is that it’s difficult to figure out what success will look like for HUD. In order to get there—to that place of success—HUD needs to invest in research and evaluation. So for example, do housing investments lead to better education for children? or better job outcomes? Donovan is frank that he doesn’t think that we can answer those questions the way we need to today. This reminds me of something that Richard Saul Wurman, the creator of the TED conference, said—knowledge must precede action.
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Reflections on Bruce Katz, 18 hours too late. | Feb 13th at 9:25am
The ideas in the room are a breath of fresh air after eight (or more) years of the only federal housing policy being the promotion of homeownership at any cost. Inclusionary zoning, the unification of land use and transportation planning at the federal level, making federal grants more flexible for metro areas that can bring down their carbon footprint, etc.
As Katz said, political jurisdictions are not markets. That is the problem in a nutshell, because the question I am left with is: “how?” Metropolitan level governance is non-existent in most of the major metropolitan areas. State government is one idea, but as John has said, this might not be the right level to be making the decisions.
The only idea I can come up with is to do what the Commerce Dept. did during the 1920s, which was to write the Standard Zoning Enabling Act, have state governments pass it, and help municipalities write the zoning code. HUD could have a standard process of making metro areas convert their metropolitan transportation councils into agencies with some real juice outside the existing local decision makers. This could be contingent on community block grant and other federal funding sources.
It just requires political will and leadership. Myron Orfield (someone familiar to this crowd) has described in Metropolitics how a political coalition can be formed to put such a program in place.
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Inside Man | Feb 13th at 9:23am
Shaun Donovan’s talk has been interesting, but I’m not sure I’d describe it as a real barn-burner. And yet, the crowd reaction reveals a level of engagement not seen in yesterday’s sessions. From time to time, as Donovan mentions one policy plan or another, a murmur makes its way through the crowd. I was wondering about this, and then I realized—this guy has his finger on the trigger. What he says reflects, more or less, what President Obama will try to do. Which is kind of exhilarating to think about. No longer are we listening to what should or might be done in an ideal world. We’re hearing the actual agenda for the next four years. And while under any circumstances it would be an appealing one, relative to the abuse of the federal bureaucracy over the past eight years it seems like a dream.
