This is from Steve Barry ( via Barry Ritholtz's Big Picture):
Thursday, April 14, 2011
Monday, April 04, 2011
Monday, March 14, 2011
"Getting banks to clear up mortgage debts would help, not hurt, the economy":
Another Inside Job, by Paul Krugman, Commentary, NY Times: Count me among those who were glad to see the documentary “Inside Job” win an Oscar. The film reminded us that the financial crisis of 2008 ... didn’t just happen — it was made possible by bad behavior on the part of bankers, regulators and, yes, economists.
What the film didn’t point out, however, is that the crisis has spawned a whole new set of abuses, many of them illegal as well as immoral. And leading political figures are, at long last, showing some outrage. Unfortunately, this outrage is directed, not at banking abuses, but at those trying to hold banks accountable for these abuses.
The immediate flashpoint is a proposed settlement between state attorneys general and the mortgage servicing industry. That settlement is a “shakedown,” says Senator Richard Shelby of Alabama. The money banks would be required to allot to mortgage modification would be “extorted,” declares The Wall Street Journal. And the bankers themselves warn that any action against them would place economic recovery at risk.
All of which goes to confirm that the rich are different from you and me: when they break the law, it’s the prosecutors who find themselves on trial.
To get an idea of what we’re talking about here, look at the complaint filed by Nevada’s attorney general against Bank of America. The complaint charges the bank with luring families into its loan-modification program ... under false pretenses; with giving false information about the program’s requirements...; with stringing families along with promises of action, then “sending foreclosure notices, scheduling auction dates, and even selling consumers’ homes while they waited for decisions”; and, in general, with exploiting the program to enrich itself at those families’ expense. ...
Notice, by the way, that we’re not talking about the business practices of fly-by-night operators; we’re talking about two of our three largest financial companies... Yet politicians would have you believe that any attempt to get these abusive banking giants to make modest restitution is a “shakedown.” ...
What about the argument that placing any demand on the banks would endanger the recovery? ... First, the proposed settlement only calls for loan modifications that would produce a greater “net present value” than foreclosure — that is, for offering deals that are in the interest of both homeowners and investors. The outrageous truth is that in many cases banks are blocking such mutually beneficial deals, so that they can continue to extract fees. How could ending this highway robbery be bad for the economy?
Second, the biggest obstacle to recovery isn’t the financial condition of major banks, which were bailed out ... and are now profiting... It is, instead, the overhang of household debt combined with paralysis in the housing market. Getting banks to clear up mortgage debts — instead of stringing families along to extract a few more dollars — would help, not hurt, the economy.
In the days and weeks ahead, we’ll see pro-banker politicians denounce the proposed settlement, asserting that it’s all about defending the rule of law. But what they’re actually defending is the exact opposite — a system in which only the little people have to obey the law, while the rich, and bankers especially, can cheat and defraud without consequences.
Tuesday, February 15, 2011
We are live:
Part of the argument is that business cycle externalities have been overlooked:
... One of the biggest risks in mortgage markets is the business cycle, and the costs of business cycles fall disproportionately on lower and middle income households. These households feel the unemployment problem more acutely than higher income households, and much of the foreclosure problem is due to the millions of households who are now unemployed.
Because middle and lower income households are more vulnerable to business cycles, they are more risky to mortgage lenders. This causes these households to face higher down payments and higher mortgage rates than otherwise, and many are excluded from home ownership altogether. But there is no reason why these households should be forced to pay the full costs of these societal risks – business cycles are not their fault – so help for these households is justified. Government mortgage insurance for loan values below some threshold is not necessarily the best way to provide this help, but it’s one way to do it. ...
Friday, February 11, 2011
A very quick -- probably too quick -- response to the administration's proposals for Fannie and Freddie (the editors wanted to know how it would affect mortgage rates -- they'll likely go up, but how much is hard to say):
I hope to say more about the economics of these proposals when I have a bit more time.
Sunday, February 06, 2011
Robert Shiller argues that we shouldn't expect another housing bubble anytime soon (there's quite a bit more on the history of land and housing bubbles in the article):
Housing Bubbles Are Few and Far Between, by Robert Shiller, Commentary, NY Times: What's the outlook for home prices over the next decade? It’s not easy to tell. ... This enormous housing bubble and burst isn’t comparable to any national or international housing cycle in history. Previous bubbles have been smaller and more regional.
We have to look further afield for parallels. The most useful may be the long trail of booms and crashes in the price of land..., although bubbles over large areas have been rather rare. Those with the biggest national impact were in the 19th century, when speculators found opportunities that had been created by government land sales and by shifts in land prices set off by construction of canals and railroads. Stories of fortunes in land speculation captured the imagination, and led to bubbles. ...
The entire 20th century appears to have had only one farmland bubble of national significance — it occurred in the 1970s. ... So land manias have been rather infrequent, many decades apart. They suggest that the recent housing bubble is a similarly rare event, not to be repeated for many decades.
But, of course, the relevance of this long history isn’t entirely clear. In contrast to the 19th century, when the business cycle proceeded without much constraint, we now have the Fed and an active government housing stabilization policy... And ... the Dodd-Frank law ... is supposed to go even further to prevent instability. ...
It will take a while for the housing market to recover fully. Still, many people continue to think of housing as an investment, and so it does seem that we are in danger of encountering another whopper bubble someday. Even so, both the history of land bubbles and the slowness of shifts in public opinion suggest that such bubbles will be fairly rare. Add the new policy restraints, and a new national housing bubble looks even less likely anytime soon.
Sunday, January 30, 2011
Vernon Smith, who is not a fan of government intervention, makes familiar arguments about how to escape from balance sheet recessions:
Mired in Disequilibrium, by Vernon Smith, Newsweek: ...Some 23 percent of homeowners owe more than their home is worth on the market, and their demand for goods is restrained by the need to pay down debt. This is the essence of a balance-sheet recession, and is what underlies the so-called Keynesian liquidity trap. ...
There are three routes to restoring equilibrium:
• Inflate the prices of all other goods, including labor, while housing demand remains stuck in its negative equity loop. Fed policy has been consistent with this objective since 2008 with no evidence of success, as is typical in severe balance-sheet recessions.
• Allow the household deleveraging process to grind through an extended period of low GDP growth and high unemployment until we gradually recover. This option will surely succeed in due course, but not without high annual opportunity cost in terms of lost wealth creation. This was the path followed in the Depression.
• Do for households what the Fed sought for the banks: the Treasury (facilitated by Fed monetary ease and bank capital requirements) finances the banks to restate the principal on current negative-equity mortgage loans, restoring them to new mark-to-market zero-equity baselines.
The last option, in principle, seeks to reboot homeowners’ damaged balance sheets in an effort to arrest a prolonged deleveraging process and more quickly restore household demand to levels no longer dominated by negative home equity. It is analogous to a mortgage “margin call” with public funding of the restored household balance sheets.
I regard the third option as far better than the stimulus, while recognizing that forgiving debt—whether bank or household debt—is never good policy. But please keep in mind that we have had no good options. (Since total negative equity is now about $700 billion, it is cheaper than was the stimulus.) ...
Where we differ is that I would do this in addition to fiscal policy, rather than dropping fiscal stimulus and doing this instead. That is, I see this as a complement rather than a substitute for other policies.
One more note. I have made similar arguments, but I've come to believe that household relief must be broad based in order to receive the public support it needs (the proposal above addresses all households that are in a negative equity position, not just those near or at default, so it is broader based than many competing proposals along these lines). If we only bail out the households who made the worst choices and are in danger of default, and do nothing for the households who have taken large losses through no fault of their own, but are still surviving and making payments, the public resentment will undermine the policy.
Wednesday, December 29, 2010
The members of the Pain Caucus see things differently when they will be the ones blamed for the pain (which tells us something about how all those calls for deficit reduction from the GOP are likely to turn out). House Republicans, who now have responsibility for the oversight of Fannie and Freddie, have decided that dismantling Fannie Mae and Freddie Mac isn't so urgent after all:
Earlier this year, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years.
Now, as Republicans prepare to assume control of the House next week, they aren't in as big a rush, cautioning that withdrawing government support in the housing market should be gradual.
"We recognize that some things can be done overnight and other things can't be," said Rep. Scott Garrett (R., N.J.), incoming chairman of the House Financial Services subcommittee, which oversees Fannie and Freddie. "You have to recognize what the impact would be on the fragile housing market as it stands right now."
I actually don't think the mortgage market will ever be truly a private sector enterprise. Suppose Fannie and Freddie were to go away: the most likely entities to step into the residential finance market would be banks. Would this be privatization? Not really. Banks receive explicit guarantees (FDIC) and, as we know from recent events, implicit guarantees as well (TARP was nothing if not the execution of an implicit Federal guarantee).
The conservative complaint about Fannie and Freddie is that they privatized profit while socializing risk. This is doubtless true. I just don't see how it is any less true for banks.
Friday, December 17, 2010
When the facts are inconsistent with the conservative narrative, conservatives "adjust the facts":
Wall Street Whitewash, by Paul Krugman, Commentary, NY Times: When the financial crisis struck, many people — myself included — considered it a teachable moment. Above all, we expected the crisis to remind everyone why banks need to be effectively regulated.
How naïve we were. We should have realized that the modern Republican Party is utterly dedicated to the Reaganite slogan that government is always the problem, never the solution. And, therefore, we should have realized that party loyalists, confronted with facts that don’t fit the slogan, would adjust the facts.
Which brings me to the case of the collapsing crisis commission. The bipartisan Financial Crisis Inquiry Commission ... has broken down along partisan lines, unable to agree on even the most basic points. It’s not as if the story of the crisis is particularly obscure. ... It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.
Last week,... all four Republicans on the commission voted to exclude the following terms from the report: “deregulation,” “shadow banking,” “interconnection,” and, yes, “Wall Street.”
When Democratic members refused to go along with this..., the Republicans went ahead and issued their own report... That report ... tells a story that has been widely and repeatedly debunked...
In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac... — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.
It’s hard to overstate how wrongheaded all of this is. For one thing,... the housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia. Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble. Beyond that... During the peak years of housing inflation, Fannie and Freddie were pushed to the sidelines; they only got into dubious lending late in the game, as they tried to regain market share.
But the G.O.P. commissioners are just doing their job, which is to sustain the conservative narrative ... that absolves the banks of any wrongdoing... Last week, Spencer Bachus, the incoming G.O.P. chairman of the House Financial Services Committee, told The Birmingham News that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”
He later tried to walk the remark back, but there’s no question that he and his colleagues will do everything they can to block effective regulation of the people and institutions responsible for the economic nightmare of recent years. So they need a cover story saying that it was all the government’s fault.
In the end, those of us who expected the crisis to provide a teachable moment were right, but not in the way we expected. Never mind relearning the case for bank regulation; what we learned, instead, is what happens when an ideology backed by vast wealth and immense power confronts inconvenient facts. And the answer is, the facts lose.
Wednesday, December 15, 2010
I've taken on the "CRA and Fannie and Freddie did it" myth so many times that I hardly have the energy to do it again (e.g. see here and here for several posts debunking this idea). So let me turn it over to Yves Smith:
Republican Members of FCIC to Promote Crisis Urban Legends, Shift Blame From Bank, by Yves Simth: Lordie, the Big Lie is with us in force. The New York Times reports that the Republican members of the Financial Crisis Inquiry Commission are going to pre-empt the report (due in mid-January) and issue their own 13 page screed later today focusing blame for the crisis on…Fannie and Freddie, and no doubt the CRA too.
Let’s look at a few inconvenient facts. We had housing bubbles in the UK, Australia, Ireland, Spain, Iceland, Latvia, Canada, and a lot of Eastern Europe. Can we blame the CRA and Fannie and Freddie for that? How about the M&A boom, which resulted in a ton of leveraged loans being issued at super low spreads? If the Fed and other central banks had not driven rates to the floor, we’d see a good bit more distress and dislocation in this sector of the market. Oh, and how about the fact that banks in Continental Europe, which had no housing bubble in their home markets, and no evil Fannie or Freddie analogues, also nearly keeled over in the crisis?
This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth. Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea. But that’s been our policy for decades. Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy...[continue reading]...
Saturday, November 20, 2010
Kate Berry of American Banker reports that B of A may have run into some new trouble regarding documentation that "could complicate attempts by the company to foreclose on soured loans" (via email from David Cay Johnston):
Countrywide Routinely Failed to Send Key Docs to MBS Trustees, B of A Employee Says, by Kate Berry, American Banker: Countrywide, the mortgage giant that's now part of Bank of America Corp., routinely didn't bother to transfer essential documents for loans sold to investors, an employee testified.
The testimony — which a New Jersey bankruptcy judge cited in dismissing a B of A claim against a debtor — could complicate attempts by the company to foreclose on soured loans that Countrywide originated...
The B of A employee's admission that the lender customarily held on to promissory notes could also undermine the industry's position that document transfers to securitization trusts are fundamentally sound.
O. Max Gardner, a North Carolina consumer bankruptcy lawyer who was not involved in the case, called the testimony "a major problem" for B of A, which acquired Countrywide ... in 2008. "These original notes were supposed to be transferred and delivered all the way up the line and for this witness to admit they were never transferred is pretty amazing," Gardner said. "I've never see this admitted anywhere." ...
Linda DeMartini, a supervisor and operational team leader in B of A's litigation management department, testified that "the original note never left the possession of Countrywide"... DeMartini "testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents"...
Whether a servicer or investor has the standing to foreclose on a borrower has become a major issue... Adam Levitin, an associate law professor at Georgetown University, said in Congressional testimony Nov. 16 that ... "If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose"...
Wednesday, November 10, 2010
When Privatization Increases Public Spending, by Ed Glaeser: ...Most of the time, privatization does indeed reduce government expenditures. ... But Fannie and Freddie are the rare exceptions where the taxpayer is safer with them in government hands rather than private hands.
Fannie Mae has been a private entity since 1968. Since then, the federal government has proven itself unable to allow let it or Freddie Mac default. ... Given the trillions in mortgage-backed securities that are securitized by these enterprises, once a crisis occurs, the government faces the option of a bailout or risking financial Armageddon. Unsurprisingly, it chooses bailouts.
I sympathize with those who would like to end any prospect of a federal backstop for these enterprises, but we don’t have that option. ... And trying to would effectively tie the hands of future Treasury secretaries and chairmen of Federal Reserve. If the federal government is going to bail out Fannie and Freddie anyway, the fiscally responsible thing to do is to keep them in government hands.
Then the government can write strict rules that limit their behavior. They can be forced to charge high fees for guaranteeing mortgages. They can be tightly restricted in the types of mortgages they insure. If they remain government entities, the leaders of the House can play a large role in designing a structure that won’t cost future taxpayers billions.
All of that control disappears when the entities become private. They will be able to experiment with new products and cut their fees to expand market share. They will be able to hold billions, or trillions, of dollars in their retained mortgage portfolios. They will be able to go back to exerting enormous political influence.
If an entity is going to be able to gamble with taxpayer dollars, then we are far safer if that entity is a slow-moving government bureaucracy than rather than a nimble, profit-seeking company. ...
I also respect those who argue that Freddie and Fannie should just disappear. Other mortgage markets work perfectly well without such government entities. But it seems dangerous to go cold turkey on government mortgage insurance in our weak economy. ...
The government-controlled version of Freddie and Fannie seem likely to disappear over time — if lawmakers make sure they charges fees high enough to cover their costs. The great advantage of a slow transition to privatization through private competition is that the government will find it far easier not to bail out any new, purely private entrants in the market. ...
Once all the mortage insurance firms are private again, why won't they be bailed out in a crisis?
Thursday, November 04, 2010
Joe Stiglitz on "corruption, American-style":
Justice for Some, by Joseph E. Stiglitz, Commentary, Project Syndicate: The mortgage debacle in the United States has raised deep questions about “the rule of law”... The rule of law is supposed to protect the weak against the strong...
Part of the rule of law is security of property rights... But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts. To some banks, this is just collateral damage... Most people evicted from their homes have not been paying their mortgages... But Americans are not supposed to believe in justice on average. ... The US justice system demands more...
To some, all of this is reminiscent of what happened in Russia, where the rule of law – bankruptcy legislation in particular – was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly.
In America, the venality is at a higher level. It is not particular judges that are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.”
It was widely known that banks and mortgage companies were engaged in predatory lending practices, taking advantage of the least educated and most financially uninformed... But banks used all their political muscle to stop states from enacting laws to curtail predatory lending. When it became clear that people could not pay back what was owed, the rules of the game changed. Bankruptcy laws were amended...
With one out of four mortgages in the US under water ... there is a growing consensus that the only way to deal with the mess is to write down the value of the principal... America has a special procedure for corporate bankruptcy, called Chapter 11, which allows a speedy restructuring by writing down debt... It is important to keep enterprises alive ... in order to preserve jobs and growth. But it is also important to keep families and communities intact. So America needs a “homeowners’ Chapter 11.” ...
Growing inequality, combined with a flawed system of campaign finance, risks turning America’s legal system into a travesty of justice. Some may still call it the “rule of law,” but it would not be a rule of law that protects the weak against the powerful. Rather, it would enable the powerful to exploit the weak.
In today’s America, the proud claim of “justice for all” is being replaced by the more modest claim of “justice for those who can afford it.” And the number of people who can afford it is rapidly diminishing.
Monday, October 25, 2010
The Economist asks:
Should the US government encourage banks to write down the principal on underwater mortgages? And if so, how?
I didn't have anything to say, but I answered anyway:
Only in ways that avoid using taxpayer cash Mark Thoma
Here are the other responses:
Yes, it's the best route to household deleveraging Viral Acharya
Banks must mark their assets to market Laurence Kotlikoff
The sooner banks acknowledge losses, the better Hans-Werner Sinn
Wednesday, October 06, 2010
The editors at MoneyWatch asked for some comments on the foreclosure crisis. It's not an issue I've followed as closely as I should have, but here's what I said:
Edward Glaeser says Fannie and Freddie should become public companies:
The Future of Freddie and Fannie, by Edward L. Glaeser: In the past, Fannie Mae and Freddie Mac operated as profit-making entities backed by an implicit government guarantee. That toxic combination always seemed designed to lose billions of taxpayer dollars, and that is exactly what happened.
Looking forward, the best option is to replace them with an entirely public entity that enables securitization by guaranteeing 30-year fixed-rate mortgages and that charges a high enough premium to stay solvent. We then should hope that private competitors will eventually put the public entity out of business. ...
The free-market friends of privatizing those entities envision a bold new world where the government no longer stands behind their debt. But if the last three years have taught us anything, it is that the government is not going to sit by and let a major part of the financial system fail.
So ... Fannie-Freddie ... will be bailed out. If the government is going to bear the costs of any future catastrophe, then it might as well ... ensure that the entity is as prudent as possible. Such prudence is far more compatible with a slow-moving public bureaucracy than with a nimble, profit-seeking private company.
The case for keeping Freddie and Fannie public reflects an even deeper problem: wealthy, powerful private companies that are deemed to have public missions find it disturbingly easy to subvert the political process. A century ago, progressives supported public ownership of streetcar lines and utilities because they believed that the owners of those companies had far too much power over local governments. ... Public ownership was seen as a way of limiting the corrupting influence of private money on local politics.
Before the crash, the political clout of Freddie Mac and Fannie Mae was legendary. If they are reformed as private entities, that influence will re-emerge and any attempt to keep them in check will fail. It is far safer to keep them profitless and public. ...
A purely public entity that charges a serious insurance fee would ensure that Americans can still get mortgages. ... Over time, we can then evolve to a healthier model...
I don't have much to add. I agree that a privatized Fannie and Freddie will be bailed out in a crisis, so they have insurance already, implicitly at least. If the companies are made public, the insurance is explicit, and an insurance fee plus regulation can offset the incentive to take on too much risk that the insurance brings about. As for the public versus private question, if there are large losses and the private insurance is insufficient to cover them, the government will have to step in anyway (as it does in natural disasters when private insurance can't cover the losses). Also, the private insurance companies would need to be large making the regulatory capture argument given above persuasive. So I'm not sure the private sector option is viable.
Monday, October 04, 2010
This study "shows the important and independent role that racial segregation played in the housing bust":
Study finds foreclosure crisis had significant racial dimensions, EurekAlert: Although the rise in subprime lending and the ensuing wave of foreclosures was partly a result of market forces that have been well-documented, the foreclosure crisis was also a highly racialized process, according to a study by two Woodrow Wilson School scholars published in the October 2010 issue of the American Sociological Review.
Woodrow Wilson School Ph.D. candidate Jacob Rugh and Woodrow Wilson School's Henry G. Bryant Professor of Sociology and Public Affairs, Douglas Massey, assessed segregation and the American foreclosure crisis. The authors argue that residential segregation created a unique niche of minority clients who were differentially marketed risky subprime loans that were in great demand for use in mortgage-backed securities that could be sold on secondary markets.
The authors use data from the 100 largest U.S. metropolitan areas to test their argument. Findings show that black segregation, and to a lesser extent Hispanic segregation, are powerful predictors of the number and rate of foreclosures in the United States – even after removing the effects of a variety of other market conditions such as average creditworthiness, the degree of zoning regulation, coverage under the Community Reinvestment Act, and the overall rate of subprime lending.
"This study is critical to our understanding of the foreclosure crisis since it shows the important and independent role that racial segregation played in the housing bust," said Rugh.
A special statistical analysis provided strong evidence that the effect of black segregation on foreclosures is causal and not simply a correlation.
"While policy makers understand that the housing crisis affected minorities much more than others, they are quick to attribute this outcome to the personal failures of those losing their homes – poor credit and weaker economic position," noted Massey. "In fact, something more profound was taking place; institutional racism played a big part in this crisis."
The authors conclude that Hispanic and black racial segregation was a key contributing cause of the foreclosure crisis. "This outcome was not simply a result of neutral market forces but was structured on the basis of race and ethnicity through the social fact of residential segregation," the authors note in the article.
"Ultimately, the racialization of America's foreclosure crisis occurred because of a systematic failure to enforce basic civil rights laws in the United States," the authors write in the article. "In addition to tighter regulation of lending, rating, and securitization practices, greater civil rights enforcement has an important role to play in cleaning up U.S. markets. It is in the nation's interest for federal authorities to take stronger and more energetic steps to rid U.S. real estate and lending markets of discrimination, not simply to promote a more integrated and just society but to avoid future catastrophic financial losses."
Wednesday, September 22, 2010
I am not as familiar with these banks as I should be. What else should I know about them?:
An oversight on oversight: The Federal Home Loan Bank, by Mark Cassell and Susan Hoffmann: Debate over financial regulatory reform has been far-reaching (see Brunnermeier et al. 2009 and Wyplosz 2009). Yet one set of institutions has gone largely unnoticed: the Federal Home Loan Bank (FHLBank) system, a government sponsored enterprise composed of 12 regional bankers’ banks that has been at the centre of sustainable home ownership finance in the US since 1932 .
The lack of attention by lawmakers is not entirely a surprise. The Federal Reserve has long overshadowed the FHLBank system. Moreover, FHLBank leaders and supporters may well prefer flying under the Congressional radar to wait out the present financial storm. Regardless of the reason, we show in our recent book Mission Expansion in the Federal Home Loan Bank System (Cassell and Hoffmann 2010) that by neglecting the FHLBank system, lawmakers miss a chance to tap the most important source of housing finance expertise in the federal government. In addition, we lose an opportunity to reform the FHLBank system, which, while not at the centre of the current foreclosure and financial crisis, was certainly a player.
Tap the FHLBank system’s housing finance expertise
Responding to the home mortgage foreclosure crisis of the Great Depression era, President Herbert Hoover spearheaded construction of a national system of Home Loan Banks. Modelled on the Federal Reserve, the FHLBank system’s size and implied government guarantee enables Home Loan Banks to raise money collectively and cheaply in the capital markets and make wholesale loans – termed ‘advances’– to member institutions, primarily for homeownership lending. Thus, for 78 years the FHLBank system has been the primary source of housing finance expertise in the US. Lawmakers should take advantage of such expertise in two ways.
First, Congress and the administration should recognise that the FHLBank system has demonstrated administrative capacity to understand and oversee the range of functions necessary for responsible, sustainable home ownership finance including regulating mortgage structure, supervising mortgage origination, and licensing mortgage bankers. Consumer protection in housing finance should be placed with the FHLBank system’s regulator, the Federal Housing Finance Agency, and not with the Federal Reserve or the proposed Consumer Financial Protection Agency.
Second, federal policies to minimise the societal harm from foreclosures, including the Home Affordable Foreclosure Alternatives Program, should be placed in the FHLBank system, the agency whose primary mission for the past seven decades has been housing finance. At present foreclosure policies are housed mainly in the Department of Treasury, an agency with relatively little housing finance expertise.
The FHLBank system requires reforms
While it is an important resource that should be tapped, the FHLBank system also requires reform. IndyMac Bank and Countrywide Bank, two of our most notorious dealers of toxic loans, were both enabled by the cheap liquidity they received from the FHLBanks of San Francisco and Atlanta, respectively. A recent report by the Federal Housing Finance Agency found that in 2008, a fifth of the collateral used to secure advances from the FHLBanks were either non-traditional, subprime or Alt-A loans. The FHLBank system has taken important internal steps to tighten its lending and underwriting standards. Despite this, we suggest three major institutional reforms are also needed.
Tuesday, September 21, 2010
Paul Krugman takes on the myth, yet again, that Fannie and Freddie caused the crisis:
Fannie Freddie Further, by Paul Krugman: OK, some readers want to know my answer to Rajan’s defense on the FF issue. So, first of all, the first time I wrote about FF, I got something wrong — I was unaware of their late in the game rush into subprime.
But Rajan’s other point, that securitization numbers — which show a much reduced role for FF at the height of the bubble — are misleading, is just wrong as a quantitative matter. Rajan makes much of the fact that the GSEs sometimes buy whole mortgages, rather than securitizing them. But as a quantitative matter, that’s just not important.
Look at the flow of funds data on mortgage holdings (pdf). You’ll see that securitization is the bulk of the story.
And let’s do one more thing: let’s look at changes in those mortgage holdings by the GSEs — securitized and not — and by asset-backed private pools. It looks like this:
During the peak of the housing bubble, Fannie and Freddie basically stopped providing net lending for home purchases, while private securitizers rushed in. Yes, very late in the game FF increased their share of subprime financing, as they tried to play catchup; but that’s really off point.* The real question is, who was financing the bubble — and it wasn’t GSEs.
Rajan asks why the government was boasting about how it was expanding low-income home ownership, if it really wasn’t. Does that really require an answer? Governments always try to take credit for stuff, and remember than in 2004 subprime was considered a good thing.
Finally, why are we so hard on Rajan? Because the central theme of his book is that the financial crisis was caused by government efforts to help low-income families — which he treats as an established, undeniable fact. But it’s by no means an established fact — on the contrary, most non-AEI analyses find government policy mainly innocent here. So his whole thesis is a structure built on foundations of sand.
*In fact, there’s much too much emphasis on subprime. The problem was the housing bubble as a whole — including the bubbles in Europe.
I've written about this so many times that I just don't have the energy to write about it again, so I am going to repeat some past posts on this topic (there are more). The "I got something wrong" Krugman mentions is evident in the first post below as the graphs he uses stop at around 2005. The subsequent point about Fannie and Freddie playing catch up, i.e. that they were followers not leaders, is covered in the next post in my reply to Russ Roberts (I think I first heard this argument in an email conversation with Dean Baker, but I don't recall for sure). So the point that Fannie and Freddie followed the private market down the tubes in an attempt to preserve market share has been known since at least September 2008, i.e. for at least three years.
Here are the posts (there are even more posts noting that "It wasn't the CRA"):
Friday, September 10, 2010
Via Vox EU:
Is this your grandfather’s mortgage crisis?, by Kenneth A. Snowden, Vox EU: The current mortgage crisis in the US is more severe than any since the 1930s. So it makes good sense to examine the origins, impacts, and consequences of that last great mortgage crisis great mortgage crisis – indeed many commentators have made a direct comparison between the two (see for example Eichengreen and O'Rourke 2010). The case for examining the last great crisis is especially pronounced given that the US Secretary of the Treasury has just asked Americans to “consider the challenge of how to build a more stable housing finance system” (Geithner 2010).
Yet we should be humble in taking up this challenge. We are after all reforming a mortgage system that was built on a framework that Depression-era policymakers forged in response to their own crisis. One of those policymakers was Henry Hoagland, who described the situation he faced in 1935 as a member of the Federal Home Loan Bank Board thus:
[A] tremendous surge of residential building in the [last] decade…was matched by an ever-increasing supply of homes sold on easy terms. The easy terms plan has a catch…[o]nly a small decline in prices was necessary to wipe out this equity. Unfortunately, deflationary processes are never satisfied with small declines in values. In the field of real-estate finance… we have depended so much upon credit that our whole value structure can be thrown out of balance by relatively slight shocks. When such a delicate structure is once disorganized, it is a tremendous task to get it into a position where it can again function normally. (Hoagland 1935)
This column looks back over the terrain that Hoagland described by examining how the residential mortgage market worked before 1930 and how it was changed by crisis and policy in the 1930s. It turns out that this history lesson provides some fresh perspective on today’s mortgage crisis (see my accompanying paper, Snowden 2010, for more details).
Friday, September 03, 2010
David Beckworth pushes back against some posts that have appeared here and elsewhere recently (my view is that low interest rates played a role, as did regulatory failures, but these were not the only causes of the crisis):
What Role Did the Fed Play In the Housing Bubble?, by David Beckworth: I really did not want to revisit this question since I have already covered it here many times before. Folks, however, are talking about it again given its coverage at the Fed's Jackson Hole conference. Mark Thoma, for example, has posted several pieces on it in the past few days. Most of this renewed discussion has taken a less critical view of the Fed's role during the housing boom, specifically the role played by the Fed's low interest rate policy. I feel compelled to rebut this Fed love fest since there are compelling reasons to believe the Fed did play an important role in creating the housing boom. To be clear, I do not see the Fed as the only contributor--far from it--but it does appear to be one of the more important ones. Here is my list of reasons why:
(1) The Fed kept its policy interest rate, the federal funds rate, below the natural or neutral interest rate for an extended period. It is not correct to say the Fed kept interest rates very low and thus monetary policy was very loose. Interest rates can be low because the economy is weak, not just because monetary policy is stimulative. Interest rates only indicate a loosening of monetary policy if they are low relative to the neutral interest rate, the interest rate level consistent with a closed output gap ( i.e. the economy operating at its full potential). There is ample evidence that the Fed during the 2002-2004 period pushed the federal funds rate well below the neutral interest rate level. For example, see Laubach and Williams (2003) or this ECB study (2007). Below is graph that shows the Laubach and Williams natural interest rate minus the real federal funds rate. This spread provides a measure on the stance of monetary policy--the larger it is the looser is monetary policy and vice versa. This figure shows that monetary policy was unusually accommodative during this time. This figure also indicates an important development behind the large gap was that the productivity boom at that time kept the neutral interested elevated even as the Fed held down the real federal funds rate.
(2) Given the excessive monetary easing shown above, the Fed helped create a credit boom that found its way--via financial innovation, lax governance (both private and public), and misaligned incentives--into the housing market. Housing market activity was further reinforced by "the search for yield" created by the Fed's low interest rates. The low interest rates at the time encouraged investors to take on riskier investments than they otherwise would have. Some of those riskier investments end up being tied to housing. Thus, the risk-taking channel of monetary policy added more fuel to the housing boom.
(3) Given the Fed's monetary superpower status, its loose monetary policy got exported across the globe. As a result, the Fed helped create a global liquidity glut that in turn helped fuel a global housing boom. The Fed is a global monetary hegemon. It holds the world's main reserve currency and many emerging markets are formally or informally pegged to dollar. Thus, its monetary policy was exported to much of the emerging world at this time. This means that the other two monetary powers, the ECB and Japan, had to be mindful of U.S. monetary policy lest their currencies becomes too expensive relative to the dollar and all the other currencies pegged to the dollar. As as result, the Fed's loose monetary policy also got exported to some degree to Japan and the Euro area. From this perspective it is easy to understand how the Fed could have created a global liquidity glut in the early-to-mid 2000s. Inevitably, some of this global liquidity glut got recycled back into the U.S. economy and further fueled the housing boom (i.e. the dollar block countries had to buy up more dollars as the Fed loosened policy and these funds got recycled via Treasury purchases back to the U.S. economy). Below is a picture from Sebastian Becker of Deutsche Bank that highlights this surge in global liquidity:
For these reasons I believe the Fed played a major role in the credit and housing boom during the early-to-mid 2000s. Let me close by directing you to Barry Ritholtz who gives more details on how the Fed's policy distorted incentives in financial markets.
Thursday, September 02, 2010
Karl Case says the American dream is still alive:
A Dream House After All, by Karl Case, Commentary, NY Times: If you read the coverage of the latest figures on the sales of existing homes..., you may well have come to the conclusion that the American dream is dead. It is indeed worrisome that sales in July were down 25 percent from a year ago. But a little perspective is in order.
First, the bad news. What has happened in the housing markets since 2005 is a catastrophe that may take years for our economy to recover from. ...
Depressing, yes — but the end of a dream? Not exactly. I have never quite understood what the American dream really means when it comes to housing. For some people, it means having a solid and fairly safe long-term investment that is coupled with the satisfaction of owning the house they live in. That dream is still alive.
Others, however, think the American dream is owning property that appreciates by 30 percent a year, making a house into a vehicle for paying bills. But those kinds of dreams have become nightmares for the millions of foreclosed property owners who have found themselves sliding toward bankruptcy.
But for people with a more realistic version of the American dream, buying a house now can make a lot of sense. Think of it as an investment. The return or yield on that investment comes in two forms. First, it provides what is called “net imputed rent from owner-occupied housing.” You live in the house and so it provides you with a real flow of valuable services. ... Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, homeowners still have a house. And this benefit is tax-free.
The second part of the yield on investment in a house is the capital gain you receive if it appreciates and you sell the house. Gains are excluded from taxation if the property is a primary residence...
Consider a few other bonuses of buying a home today. You can deduct the interest you pay on the mortgage. Interest rates are about as low as they can get. And, don’t forget, home prices are down by 30 percent on average from the peak. ...
Do the math. Four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of about 6.6 percent was $1,533. Today that $300,000 house would sell for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. In addition, the down payment would be $42,600 instead of $60,000. ...
[H]ousing has perhaps never been a better bargain, and sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again. The American dream is not dead — it’s just taking a well-deserved rest.
There's been a lot of talk about the virtues of renting lately, but for me -- and from the sounds of it perhaps I'm one of the few -- renting and owning are nowhere near perfect substitutes. Not even close.
Sunday, August 29, 2010
Did low interest rates cause the financial crisis as John Taylor and others contend? (I've argued that the low interest rate policy contributed to the crisis, but by itself was not the major factor. That is roughly consistent with their conclusion, though their numbers on the degree to which interest rates mattered are lower than I would have predicted):
Can interest rates explain the US housing boom and bust?, by Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko: Between 2001 and the end of 2005, the Standard and Poor’s/Case-Shiller 20 City Composite House Price Index rose by 46% in real terms. By the first quarter of 2009 the index had dropped by about one-third before stabilizing. The volatility of the Federal Housing Finance Agency (FHFA) repeat-sales price index was less extreme but still severe. That index rose by 53% in real terms between 1996 and 2006 and then fell by 10% between 2006 and 2008. As many financial institutions had invested in or financed housing-related assets, the price decline helped precipitate enormous financial turmoil.
Much academic and policy work has focused on the role of interest rates and other credit market conditions in this great boom-bust cycle.
- One common explanation for the boom is that easily available credit, perhaps caused by a “global savings glut,” led to low real interest rates that boosted housing demand (Himmelberg et al. 2005, Mayer and Sinai 2009, Taylor 2009).
- Others have suggested that easy credit market terms, including low down payments and high mortgage approval rates, allowed many people to act at once and helped generate large, coordinated swings in housing markets (Khandani et al. 2009).
Those easy credit terms may have been a reflection of agency problems associated with mortgage securitization (Keys et al., 2009, 2010, Mian and Sufi, 2009 and 2010, Mian et al. 2008).
If correct, these theories would provide economists with comfort that we understood one of the great asset market gyrations of our time; they would also have potentially important implications for monetary and regulatory policy. But economists are far from reaching a consensus about the causes of the great housing market fluctuation. For example, Shiller (2003, 2006) long has argued that mass psychology is more important than any of the mechanisms suggested by the research cited above.
Re-evaluating the missing link
Motivated by this question, we re-evaluate the link between housing markets and credit market conditions, to determine if there are compelling conceptual or empirical reasons to believe that changes in credit conditions can explain the past decade’s housing market experience.
Friday, August 27, 2010
The arguments below concerning Fannie and Freddie's role in the crisis have been made many times here over the last several years, see the second link at the end, but it's worth a reminder given the concerted attempt by anti-government types to make people think that Fannie and Freddie played a large role in causing the crisis. They didn't. That's not to say that Fannie and Freddie are defensible in their present form, see this discussion for example, or this from Dean Baker. But placing the blame for the crisis in the wrong places will lead to ineffective and potentially counterproductive attempts to prevent this from happening again:
An Autopsy of Fannie Mae and Freddie Mac, by Binyamin Applebaum, NY Times: Here’s a last-minute option for summer reading material: An autopsy on Fannie Mae and Freddie Mac by their overseer, the Federal Housing Finance Agency.
The report aims to inform the continuing debate in Washington about the future of the government’s role in housing finance. ... And it does a good job of making a few key points:
1. Fannie and Freddie did not cause the housing bubble. In fact, you can think of the bubble as all the money that poured into the housing market on top of their regular and continuing contributions. There’s a good chart on Page 4 of the report illustrating this...
The market share of the two government-sponsored companies plunged after 2003, and did not recover until 2008. In 2006, at the peak of the mania, the companies subsidized only one-third of the mortgage market.
2. This was not for a lack of trying. The companies bought and guaranteed bad loans with reckless abandon. Their underwriting standards jumped off the same cliff as every other participant in the mortgage market.
3. Importantly, the companies’ losses are mostly in their core business of guaranteeing loans, not in their investment portfolios. The guarantee business is the reason the companies were created. ...
Wednesday, August 25, 2010
The Room for Debate asks:
Can the economy recover without a turn-around in home sales? Many say that job improvement has to come first, but the bad news on housing sales has put a new gloom on expectations of a recovery. Does the housing market have to lead the way out of the hole? If so, why?
The 800 word version of my response is below, but if you prefer, the edited, less wordy 400 word version, it is here along with responses from Jennifer H. Lee, Jeffrey Frankel, Patrick Newport, and Dean Baker [all responses]. Among other things, I wish I'd talked more about employment:
The bad news for recovery seems to be nonstop lately, with new home sales, which were at a record low in July, and durable goods orders, which came in far below expectations, continuing the trend. What does this say about the prospects for recovery?
It’s useful to break down the economy into four major sectors — households, businesses, government, and the foreign sector — and consider how each will affect both long-run and short-run prospects for growth.
Household consumption, which excludes the purchase of new homes (more on this in a moment), is unlikely to be the engine of growth that it has been in recent decades. Consumption before the crash was largely debt fueled, based on the false promise of continuously rise housing prices, and therefore unsustainable.
It’s widely believed that consumers will move to a lower level of consumption and a higher level of savings after the recession. During this transition, lower consumption growth will be a substantial drag on the economy — this would be on top of the decline in consumption caused by the recession itself. So while growth may return to normal in the long-run, it’s unlikely that this sector will lead the way to recovery.
If consumption by households isn’t the answer, what about investment? In the national income accounts, the purchase of new homes is counted as part of investment. Can investment by businesses or home purchases pick up the slack?
While housing will some day grow normally again, the large excess inventory of homes, poor sales, and other problems right now means that day is far, far away. In the short-run, looking to housing to lead the recovery is likely to lead to disappointment.
Business investment does not provide much hope either (the weak report durable goods orders on Wednesday is no comfort). Business investment might pick up some once there are signs of improvement in the economy, and if the Fed lowers long-term interest rates through quantitative easing, but this sector will follow the expectation of better times, it won’t lead them.
As for foreign exports, which is one of our best hopes for growth in the long-run, it hard to see that sector leading the recovery since the rest of the world is having troubles too.
So there’s very little besides government that can provide the needed boost to the economy in the immediate future. If government can provide the bridge across our short-run problems, then the other sectors can take over and generate long-run growth, and the hope is that the growth will be as robust as before the recent crash. But there’s guarantee that hope will be realized.
Sunday, August 22, 2010
Is housing the best way for low-income people to build wealth?, by Richard Green: I was thrilled to be invited to the Future of Housing Finance conference held at the Treasury Department and co-sponsored by HUD this week. It was particularly nice to be seated next to Self-Help's Martin Eakes, whom I have admired for some time. Like Elizabeth Warren, Eakes long ago had insights into sub-prime lending that I wish more of us had taken seriously.
At the conference, Martin worried about a conversation that emphasized the need for robust underwriting standards for the mortgage market going forward. The three most important standards are loan-to-value ratio, payment-to-income ratio, and credit history. As Martin pointed out, African-Americans have less wealth available for down-payment than others (even after controlling for income), and have lower FICO scores than others, and therefore will be denied access to credit at a greater rate than others if underwriting standards are tough and uniform. Because much of the reason that African-Americans lack wealth is because they have been systematically stripped of wealth for many generations, policies that reduce access to credit disproportionately for African-Americans violate fairness.
The events of the past six or seven years show that loose underwriting does nobody any favors, either. Foreclosures are terrible things for the families who experience them and for the communities that have large numbers of them. The whole point of underwriting is to prevent default and foreclosure, and the unpleasant fact is that downpayment and FICO are predictors of likelihood of default.
In the era where almost all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving. Those who got a 20 year mortgage in 1960 owned their house free and clear in 1980; households gained wealth not because housing was such a great investment, but because they built equity, month after month. Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.
Perhaps, then, the government could come at the savings issue more directly by giving low-income people a nudge toward saving. Suppose it developed a 401(k) type plan that matched the savings of those with below-median incomes at 2 to 1. This would encourage savings that then could be used for a down payment or a host of other investments (say a Vanguard index fund). This would cost taxpayers money, but perhaps less than mortgage programs built on thin underwriting standards. At the same time, getting people into the habit of savings could produce other social benefits as well. I am not sure such a plan is practical, but I think we do need to think about how we can help people who have been denied wealth for generations how to start accumulating assets without relying entirely on the housing finance system to do it.
We also need to ensure that when people with limited experience in such markets do participate in financial markets by buying houses, investing their savings, etc., they aren't steered toward products that are highly profitable for the originator, but not the best fit for the borrower/investor. It's my understanding that such behavior -- steering people into the wrong products -- explain part of the problems observed in subprime markets. Perhaps we need a consumer finance protection agency? And someone to lead it who understands these issues? However, it's not enough to simply provide advice about financial products. That will help, but some of this was fraud that needs to be prosecuted -- it won't stop otherwise.
Monday, August 09, 2010
Did the Bush tax cuts generate economic growth?:
Economic Growth and the Bush Tax Cuts, by David Leonhardt, Economix: In a detailed look at the Bush tax cuts in the current issue of Bloomberg Businessweek, Peter Coy writes:
They were supposed to promote long-term growth by realigning incentives. On that score their legacy is hard to measure because there’s no way to know how the economy would have fared without them. Many companies instituted dividends to take advantage of the tax break, but whether that induced more investment is unclear. What’s indisputable is that deficits grew while the U.S. economy rumbled along in slow gear: Growth averaged 2.3 percent a year from the end of the 2001 recession through December 2007, at which point the economy tumbled into the worst downturn since the Great Depression.
I agree there is no way to know for sure how the economy would have fared without the tax cuts. But the evidence we have does not suggest the cuts were especially good for growth. The expansion that began in 2001 and ended in 2007 had average annual economic growth of 2.7 percent. That was the slowest of any expansion since World War II.
Some of this is a reflection of slowing growth in the working-age population. If you control for these demographic changes, the 2001-7 expansion compares favorably with the 1970s, but that’s not exactly high praise. No matter how you examine the numbers, the Bush expansion was significantly weaker than the expansions of the 1990s and 1980s. It’s hard to see how the cuts induced a lot of additional investment or persuaded a lot of people to enter the work force.
Of course, the stronger expansions of the 1980s and 1990s were also not followed by terribly deep recessions. Looking at the full business cycle makes the past decade appear even worse. Might it have been even worse without tax cuts? Sure. But the burden of proof certainly seems to rest with anybody who tries to make that case.
Much of the growth that was observed during the Bush years was due to the housing bubble. That growth was illusory, and if we were to adjust for the illusory component of the growth that shows up in the measurements cited above, the Bush years would look even worse.
Monday, July 19, 2010
The Economist asks:
What should be done with Fannie Mae and Freddie Mac?
There are two potential justifications for the existence of institutions like Fannie and Freddie. One is to solve a significant market failure in the private sector mortgage market. If there is some reason why the mortgage market does not function properly on its own, perhaps due to lack of information on one side of transactions, inefficient risk management, adverse selection, the presence of moral hazard, etc., then government can step in and fix the problem.
The second justification is the role these institutions can play in stabilizing the macroeconomy. Contrary to what you may have heard from people who want you to believe that government is always the problem and never the solution -- the people who try to blame Fannie and Freddie for the crisis despite evidence they weren't the primary cause -- having such institutions in place may allow a better response to a financial crisis than would otherwise be possible.
With respect to the market failure justification, no market is perfect, and the mortgage market is certainly no exception. Even so, I think it's hard to justify the existence of Fannie and Freddie based upon their ability to solve private sector market failures. To the extent that market failures do exist, there are better ways to overcome them. For example, there may be externalities from home ownership that accrue to the local community, but these benefits are not captured in the price of homes. If this is the case and the external benefits are large, then there may be a role for government to subsidize home ownership. However, simple mechanisms such as tax rebates can be used to solve this problem, we wouldn't need Fannie and Freddie. Since the same is true for most other examples of mortgage market failure I can think of, it's hard to justify the existence of Fannie and Freddie based upon their ability to effectively overcome imperfections in the mortgage market.
I think a better case can be made for Fannie and Freddie based upon the role that they can (and did) play in helping to stabilize a financial system that is in crisis. Fannie and Freddie concentrate risk that is dispersed across many different banks and other financial institutions. If a systemic shock hits, instead of having all the difficult problems that come with the nearly simultaneous failure of such a large number of banks, only one or two institutions get into trouble. This allows regulators to focus their efforts on these institutions as they attempt to stabilize the financial system.
The politics of the recent bailout of Fannie and Freddie are lousy, and the distribution of benefits to large banks through the backdoor bailouts Fannie and Freddie provide could certainly be improved, but mortgage markets may have failed entirely were it not for Fannie and Freddie. In addition, they have helped to keep long-term interest rates low through their purchase and guarantee of mortgage contracts. Things are bad, but a completely dysfunctional mortgage market coupled with much higher long-term interest rates would have been much, much worse.
However, it's important to note that it's not certain that the effect of institutions like Fannie and Freddie will, on net, be positive. The benefit of these institutions is that they allow us to more effectively stabilize mortgage markets -- which are prone to bubbles -- when they get into trouble. However, there is also a cost. The implicit government guarantee that stands behind Fannie and Freddie increases risk taking behavior overall making crises both more likely and more severe.
This means that effective regulation of risk taking behavior will improve the chances that Fannie and Freddie are beneficial on net. As explained at the link given above, regulation of Fannie and Freddie was relatively successful in this regard, but far from perfect. It was the private sector, not Fannie and Freddie, that took the lead in exploiting the short-run profit potential of risky mortgage products. Initially, regulation kept Fannie and Freddie out of these highly risky markets. It wasn't until Fannie and Freddie began losing market share that they began to find ways around the restrictions that prevented them from pursuing the same risky strategies. They were followers, not leaders, into subprime markets.
However, the fact that they could follow at all indicates that regulation was less than perfect. The loss of market share should have been a signal that the private sector markets needed closer scrutiny, and Fannie and Freddie should not have been allowed to follow the private sector down the sinkhole. The fact that Fannie and Freddie were allowed to follow private sector into risky markets when they began losing market share to private sector firms, and the failure to adequately regulate the risk that private sector institutions could take undermines faith in regulators and makes the case for Fannie and Freddie murky.
I still think that, overall, having Fannie and Freddie was beneficial, and I'll give lukewarm support for these institutions. But that support is conditional upon the expectation that regulators will do a better job of monitoring and regulating the amount of risk that is present in financial markets. The presence of institutions like Fannie and Freddie encourages banks to take on additional risk, and the additional risk generates costs that can more than offset the benefits Fannie and Freddie provide in terms of helping to stabilize the financial system when it gets into trouble. We need to do a better job than we have in the recent past of regulating the amount of risk that banks can take in response to the insurance that they get from the implicit government support of Fannie and Freddie. If we can't, then the case for the existence of Fannie and Freddie is much harder to make.
Saturday, July 10, 2010
The location of poverty is shifting:
Rethinking the geography of American poverty, by Steven Yaccino, University of Chicago News: For decades, suburban living has been synonymous with America’s upper middle class, a stereotype that emerged from the "Leave it to Beaver" era and morphed into today’s gated communities, mega-malls, and million-dollar mansions. But even before the recession, Elizabeth Kneebone says that idyllic American Dream was only one side of the suburban coin.
“People have this idea that poverty is this ultra-urban or ultra-rural phenomenon,” says Kneebone, a senior research analyst at the Brookings Institution’s Metropolitan Policy Program. “They think of inner cities or Appalachia, but in reality American poverty is increasingly suburban.”
Kneebone..., citing a paper she published earlier this year... describes how major metropolitan suburbs saw their poor populations increase by 25 percent over the last decade. That’s almost five times more than America’s largest cities, making them the largest and fastest-growing poverty demographic area in the country. By 2008, large American suburbs were home to 1.5 million more poor people than their primary cities and housed almost a third of the entire nation’s poor...
Since post-WWII suburbanization, millions of people have been flocking to the fringe of metro areas. More recently, that trend also has brought an influx of low-income Americans searching for affordable housing, jobs, and schools. ...
While the trend predates the recent downturn, Kneebone attributes part of recent poverty increases to large employment declines in suburbanized industries like real estate, retail, construction, and manufacturing. The economic fallout, she says, could carry on well into recovery, posing new policy challenges to suburban governments that are not used to such high demand for safety net services.
Given the added stress on these systems and limited capacity, Kneebone has been urging policy-makers to ... start crafting effective solutions before things get worse. “If you have an outdated understanding of where poverty is in the country or where the poor populations live, it’s hard to shape an effective response,” she says. ...
Tuesday, June 22, 2010
More on 30 year fixed rate mortgages. Nick Rowe disagrees with Richard Green:
US fixed rate mortgages aren't fixed rate mortgages; they are weird, stupid, and dangerous, by Nick Rowe: Americans aren't really insular, like the English. But they live in a very big country, and that can have the same effect. If there's something peculiar about the US, Americans sometimes won't realise how peculiar it is. US mortgages are peculiar. "Weird" is a better term.
Patrick Lawler, as described by James Hagerty, has tried to explain to Americans that their 30-year fixed rate mortgages aren't 30-year fixed rate mortgages, and that they are weird, stupid, and dangerous. He failed, perhaps because he ran out of time. Richard Green didn't get his point (H/T Mark Thoma). So I'm going to try.
First off, American 30-year fixed rate mortgages aren't 30-year and aren't fixed rate. The term is variable, and the rate is variable. That's because they are "open" mortgages, rather than "closed" mortgages. A 30-year 6% closed mortgage really does have a fixed term and a fixed rate. You know exactly how much you will be paying per month for the next 30 years. An open mortgage means you have the option to pay off or refinance that mortgage at any time over the next 30 years. And you will of course exercise that option at any time when the market interest rate for the remaining term falls below the rate you are currently paying. And exercise it again, if the market rate falls again. So the actual term is whatever you want it to be, and the interest rate you actually pay will vary, if market rates for the remaining term ever fall below the initial rate, as they almost certainly will (as I shall explain).
The option to renew sounds good. It's like a one-way bet. Heads, and interest rates fall, you exercise the option and win the bet. Tails, and interest rates rise, you stay locked in and the bet's off.
If the option were free, of course you would want an open mortgage. You can't lose. But, of course, there must be someone taking the other side of the bet. The lender won't sell you that option for free. You have to pay for it, and you pay for it in higher interest rates.
The longer the remaining term to maturity of the mortgage, the greater the chance that market rates will fall, the more that option is worth, and the higher the interest rate premium you would pay to buy that option. If you only have a couple of months left on the mortgage, interest rates won't move very far in that short time, so an open mortgage will have only a slightly higher interest rate than a closed mortgage. So even if interest rates on closed mortgages have no trend up or down as the remaining term to maturity shortens over time, interest rates on open mortgages will tend to trend down as the remaining term to maturity shortens. So the option to refinance will probably be exercised again and again.
I can understand the argument in favour of 30-year fixed rate mortgages, if they are truly 30-year and fixed rate. Which means a closed mortgage. A risk-averse person borrowing to buy a house knows exactly what he will be paying until the mortgage is paid off. But why would such a risk-averse person ever want to buy an option that interest rates will fall?
That's what's so weird about open mortgages. It's not just weird, it's stupid. It's like an insurance company bundling lottery tickets with its insurance. "Sorry, but you can't buy fire insurance unless you buy a lottery ticket at the same time". Actually, it's even stupider than that, because at least the lottery and fires are independent probabilities. The reason you didn't chose a variable rate mortgage is presumably because you wanted to insure against interest rate risk. So why buy a one-way bet on interest rate risk at the same time?? It's really stupid.
It's equally weird and stupid from the lender's point of view. Lenders aren't always risk-neutral; they care about interest rate risk and liquidity risk. If you are about to retire, and want a safe income for the next 30 years, or if you are a pension plan looking for an asset that provides a safe return to match your fixed payouts to retiring clients, a 30-year fixed rate mortgage looks like a good investment, if it were truly 30-year and truly fixed. Why would you ever at the same time want to write an option on interest rates? Why would you ever agree to write a one way bet that you lose if interest rates fall? Falling interest rates are the one thing that retirees and pension plans want to insure against, not bet that they won't happen! It's really stupid.
It's equally stupid from the liquidity risk point of view. The job of banks is to convert illiquid assets into liquid liabilities. It's not an easy job. But it's an even harder job if you don't know how liquid your assets are. You know in advance when a closed mortgage will be paid off, assuming no default. With an open mortgage you have no idea when it will be paid off, even assuming no default. Plus, banks borrow short and lend long. A fall in interest rates is good for banks, because the value of their long assets rises more than the value of their short liabilities. But a fall in interest rates is just the time when people will pay off their open mortgages, so banks get lots of liquidity when they least need it. It's really stupid.
Stupid, and also I think dangerous. But this is the bit I don't understand too well. As I understand it, one of the main reasons behind the securitisation of mortgages in the US was because of the interest rate risk and liquidity risk I have talked about above. Banks didn't want to hold risky open mortgages on their books. So they securitised them and sold them off. Then the default risk turned out to be higher than the buyers of those securities thought it would be. And because the mortgages were sliced and bundled, it was impossible in practice for the lender to renegotiate terms with a borrower in difficulties. (Plus, there's the other weird and stupid feature of US mortgages [edit: in many states] that they are non-recourse, so the borrower can just hand in the keys and walk away, but that's a whole other subject). And then everything went pear-shaped when house prices fell.
Understandably, Americans don't like foreigners interfering in their internal affairs. But dammit, the US is big, rich, powerful and important, not some piddling little country that doesn't really matter to the rest of the world. When the US financial system catches a cold, other countries will at least sneeze. US 30-year fixed rate mortgages are not 30-year and not fixed rate. They are are weird, stupid, and dangerous. They need to know that.
30-Year Fixed-Rate Mortgage Debate, by Arnold Kling: Richard Green likes them. Nick Rowe does not. I can understand Green's antipathy toward the most common forms of adjustable-rate mortgages in the United States. However, I think that a mortgage that amortizes over 30 years, with an interest-rate adjustment every five years, and no teaser rate would be better than any of the common mortgages here. The five-year fixed term would suit many people, since many people move in less than ten years.
In any case, regardless of what Green or Rowe or I believe is the right mortgage, I think that the market ought to decide. It is my hypothesis that, in the absence of government support (including loading the tail risk onto taxpayers), the thirty-year fixed-rate mortgage with no penalty for either prepayment or default would be priced too expensively to attract borrowers.
I'm trying to meet a deadline, so I'll have leave comments to you.
Richard Green says "If we do away with Fannie and Freddie, we may also do away with the 30-year fixed rate mortgage," and that may not be good for home buyers:
Allotted only about 10 minutes to share his vision, Mr. Lawler....first made the obligatory statement that he was expressing his own views and not those of his federal agency. Yeah, right, I thought, and reached for my triple espresso.But then Mr. Lawler launched a frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty. If more members of the audience had been fully awake at this moment, I feel sure that their gasps would have been audible.Now, Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will move or die long before then. They love to refinance every time rates drop and then brag to their neighbors about how much they are saving per month.What they don’t stop to realize often enough is that they are paying a very large price for that privilege– twice.The context is important. One of the reasons the 30 year fixed rate mortgage is ubiquitous is the United States may be the existence of Fannie and Freddie. If we do away with FF, we may also do away with the 30-year fixed rate mortgage. So let me defend the 30-year fixed a bit with something I wrote about 3 years ago:The problem with advising people to use adjustable rate mortgages, however, is that ARMs give households liabilities that have short duration--that is, liabilities whose market value remains close to face value at all times. This is because the rates on ARMs by definition change to meet market rates on a regular basis. Houses, on the other hand, are assets with lots of duration. The services they give to homeowners (shelter and a set of amenities) is pretty much invariant to market conditions. Consequently, house values change with market conditions, such as changing interest rates.Good financial management practice suggests that to minimize risk, the duration of of assets and liabilities for any institution, including households, should be matched. In the case of houses, this means that households looking to minimize risk should use a fixed rate mortgage to finance their house. There are exceptions--if one buys a house and expects to sell it in five years, a five year ARM makes lots of sense, because the duration of the asset (housing services over five years) and the liability would match.This is not to say there is anything wrong per se with people getting ARMS, so long as they explicitly understand the risk embedded in them. But a principle I have been pushing for years is that if people can't afford a house with a fixed-rate mortgage, they probably shouldn't buy a house. It is one thing to have the option of the FRM, and then decide to take the risk of the ARM anyway. One of the nice things about the United States is that FRMs are easy to come by--this is not true in most countries around the world. It is something else to be forced into taking a risk in order to buy. Under these circumstances, buying probably isn't worth it.
Friday, June 18, 2010
Are foreclosures racist?, by Felix Salmon: If you’re a high-income Latino with a mortgage, you’re almost twice as likely to be facing foreclosure than a high-income non-Hispanic white person. And in general, the foreclosure crisis is hitting blacks and Latinos much harder than it is whites, according to a startling new report from the Center for Responsible Lending.
Overall, there have been 790 foreclosures per 10,000 loans to blacks, and 769 for Hispanics — compared to just 452 to non-Hispanic whites. And within every income group, the disparities are startling: here’s the chart. ...
The “Disparity Ratio” here is essentially the likelihood of being foreclosed upon, compared to the likelihood of a similar-income non-Hispanic white being foreclosed on. It’s interesting that the disparity ratio is pretty stable for blacks, but rises sharply with income for Latinos. I’ll hazard a guess and say that this probably has something to do with a lot of middle- and high-income Latinos in California and Arizona being sold subprime mortgages, even when they qualified for a prime loan.
Why would Latinos be more susceptible to being taken advantage of in that way than non-Hispanic whites? Now I’m really speculating, but it stands to reason that financial sophistication is a function not only of your income today but also of your family’s income when you were growing up. If rich Latinos are more likely to come from poor families than rich whites, then that might explain some of the disparity here.
Even so, it’s very depressing to see the results here. Already the median non-Hispanic white family reported $171,200 in net worth versus only $28,300 for non-white and Hispanic families, and this crisis is only making matters worse. The CRL reports:
The indirect losses in wealth that result from foreclosures as a result of depreciation to nearby properties will disproportionately impact communities of color. We estimate that, between 2009 and 2012, $193 billion and $180 billion, respectively, will have been drained from African-American and Latino communities in these indirect “spillover” losses alone.
Those are really big numbers. One might have hoped that blacks and Hispanics might have been less badly hit by the foreclosure crisis simply by dint of their much lower levels of homeownership. But it seems that isn’t the case.
I hope that someday people will realize that there is a story here about mortgages, foreclosures, and race. But it is not the story you hear, the one about politicians using the CRA, Fannie, and Freddie to force otherwise well-behaved financial institutions to make loans to unqualified borrowers. The story is an old one, it's about misbehavior in the private sector where one group of individuals takes advantage of another in the quest for profit. However, the claim that the government forced this behavior through the CRA, Fannie, and Freddie that isn't supported by the evidence. That's not to say that the government played no role in this outcome. Regulatory agencies were warned about this, but failed to intervene and stop the practice of selling subprime or other high cost, high profit mortgages to people who qualified for better terms, and to that extent the government did fall down on the job. It was this failure, not Fannie, Freddie, and the CRA, that allowed these ill-fitting but highly profitable mortgages to be made.
Update: From today's McClatchy News: Minorities hurt more by foreclosure crisis, study says:
...In addition, previous research by Ernst and others found that black and Latino borrowers were about 30 percent more likely to receive the highest-cost subprime loans when compared to white subprime borrowers with similar risk characteristics. This type of unscrupulous activity by mortgage brokers, combined with poor loan underwriting and a lack of industry oversight, caused the subprime market to crash with devastating impact on minority borrowers.
"These loans were clearly the most abusive mortgages in the marketplace and among the least-regulated, and they were most likely to be targeted to communities of color. So in essence, what we have is a recipe for what's come to pass," Ernst said. ...
Let me add that I was careful not to make the claim that selling subprime loans to buyers who qualified for better terms was the result of racism. I said the motivation was profit seeking behavior, and I don't see any need to take it beyond that.
Also, let me address this from Arnold Kling:
However, the main driver of defaults is not loan terms. It is the decline in home prices.
Isn't it shocks to income, things like unemployment, or other shocks to households such as divorce that drive foreclosures? I wonder which groups in society are more likely to become unemployed during a downturn? He also seems to be countering the racism explanation -- and some people may be making that charge -- but, again, that's not the argument I am making.
Finally, he asserts that the most likely explanation for the higher foreclosure rate is that
minorities might have had a higher propensity to jump into the housing market at the wrong time and to overpay for houses. This would mostly be due to lack of experience with the housing market, but it could also be a contagion effect as they saw friends and relatives taking the plunge into real estate.
The "lack of experience" argument he is making seems to me to be consistent with the explanation that unscrupulous lenders were seeking a profitable opportunity, and there weren't any regulations or other mechanisms in place to prevent these lenders from steering inexperienced buyers into the highest profit loans (or if there were, nobody to enforce them). If Arnold wants to call this "favorable discrimination," he can, but it's certainly not the term I'd use for it.
Saturday, June 05, 2010
I've written the CRA and Fannie/Freddie rebuttals so many times over the last few years, e.g. see here and here, and it just came up here, that it seems repetitive to take it up yet again. But it doesn't seem to want to go away, so one more time, with gusto:
The Sarah Palinization of the financial crisis, by Edmund L. Andrews: Of all the canards that have been offered about the financial crisis, few are more repellant than the claim that the “real cause’’ of the mortgage meltdown was blacks and Hispanics.
Oh, excuse me -- did I just accuse someone of racism? Sorry. Proponents of the above actually blame the crisis on “government policy’’ to boost home-ownership among low-income families, who just happened to be disproportionately non-white and immigrant. Specifically, the Community Reinvestment Act “forced’’ banks to make bad loans to irresponsible borrowers, while Fannie Mae and Freddie Mac provided the financial torque by purchasing billions worth of subprime paper.
The argument has been discredited time and again, shriveling up almost as soon as it’s exposed to sunlight. But it keeps coming back, mainly because the anti-government narrative gives Republicans a way to deflect allegations that de-regulation allowed Wall Street to run wild. It’s the financial version of Sarah Palin’s new line that “extreme environmentalists” caused the BP oil spill. ...
But far more outrageous is this working paper, which Bruce Bartlett brought to my attention, published last month by no less an authority than the World Bank. What galls me ... is that the World Bank would cloak a piece of political drivel with fixings of a serious economic analysis. Written by David G. Tarr,... the paper says Wall Street and the banks were led by the government like lambs to the slaughter. ...
But none of the devil-made-me-do-it arguments is new, and none of them is true. The Federal Reserve analyzed the Community Reinvestment Act in 2008, and emphatically concluded that it had nothing to do with the explosion of hallucinogenic mortgage lending. ...
What makes this smear so repellent is that it blames poor people – mostly minorities – for bringing on the crisis. But what makes it so maddening is that it’s so demonstrably false. We have reams of evidence that banks and mortgage lenders actively targeted blacks, Hispanics and other immigrant groups for reckless loans. The lenders weren’t forced. They were making a fortune.
An almost equally unforgivable lie is that Fannie and Freddie caused the subprime meltdown. ... Fannie and Freddie weren’t driving the market. They were scrambling to keep up with private mortgage securitizers.
As Krugman shows, Fannie and Freddie were largely sidelined during the heyday of the subprime market, partly because they were doing penance for their prior accounting scandals. Fannie and Freddie’s market share in securitizations slumped from 2004 until 2007. By contrast, the market share of private issuers soared. ... Fannie and Freddie ... pushing their private sector rivals to roll the dice. They were late to the craps table and desperately trying to make up for lost time.
Thursday, May 20, 2010
Stunning Overbuilding Fact of the Day, by Richard Green: I am listening to a presentation at the Homer Hoyt meetings on the condo meltdown in South Florida. Developers planned on building 95,000 units in the city of Miami between 2002 and 2007. In the 2000 census, the whole city had 163,000 units.
Unless the old people who move to Florida and buy these condos are partying so hard they destroy them in a few years -- maybe golf and bingo really bring out the wild side -- then that is, as noted, some "stunning overbuilding." Makes you wonder about the claim there is no way to tell if a bubble is developing until it pops.
Friday, May 07, 2010
It's hard to defend the home mortgage interest deduction, but if you're so inclined, feel free to try:
A tax break that is breaking us, by Edward L. Glaeser, Commentary, Boston Globe: The latest Case-Shiller housing data suggest that housing markets have now stabilized. ... This stability makes it possible to move beyond stop-gap measures and to envision fundamental reforms that will make the next housing crisis less damaging. Lowering the $1 million cap on the home mortgage interest deduction is a good place to start. ...
I’m not claiming that government policies, like the mortgage interest deduction, caused the bubble. The deduction is an old policy that has remained a constant in good times and bad. Moreover, the bubble can’t be explained by low interest rates or easy mortgage approvals or high loan-to-value ratios. The historical relationship between these variables and housing prices is just not large enough to explain either the boom or bust. America’s great housing convulsion is best seen as an enormous, almost inexplicable whirlwind that was created by ebullient, but incorrect, beliefs about never-ending home price appreciation.
But while government policies cannot be blamed for the bubble, they did exacerbate its damage. For decades, the home mortgage interest deduction and government-subsidized institutions like Fannie Mae and Freddie Mac have made mortgages artificially inexpensive. This subsidy encouraged homebuyers to borrow like mad and tie their fortunes to the housing market.
During the boom, these policies were thought to lead Americans to accumulate housing wealth and create an “ownership society.’’ We now know that encouraging people to borrow to buy homes can just as easily lead towards a "foreclosure society"...
The home mortgage interest deduction also subsidizes Americans to buy bigger homes... In an age of global warming, why should we subsidize the greater energy use inherent in larger homes? There is a powerful connection between structure type and ownership, which means that encouraging homeownership implicitly encourages sprawl..., which is bad for cities, bad for traffic congestion and bad for carbon emissions.
The mortgage interest deduction is also extremely regressive. ... Now that prices have stabilized, we can imagine slowly leading this political sacred cow towards a good stockyard. The interest deduction currently has an upper limit of $1 million. That limit could be reduced by $100,000 per year over the next seven years, which would lead to a less regressive $300,000 cap. After that point, we could consider replacing the interest deduction altogether with a flat homeowner’s tax credit that would encourage homeownership without encouraging borrowing or big houses. ...
Sunday, April 25, 2010
This story about banks "offering high-cost loans to many black borrowers during the subprime lending boom, even though many of the applicants could have qualified for lower interest rates and closing costs" hasn't received enough attention. I won't speculate as to why this story has been so widely ignored, but it's not hard to come up with reasons that echo the racial-discrimination discussed below:
Bias Accord as Harbinger, by Bob Tedeschi, NY Times: A decision this month by the National Association for the Advancement of Colored People to drop its racial-discrimination lawsuit against Wells Fargo in exchange for a say in reviewing its lending practices could set the stage for similar agreements with other big mortgage lenders...
From 2007 to 2009, the N.A.A.C.P. filed suit against 15 lenders, accusing them of offering high-cost loans to many black borrowers during the subprime lending boom, even though many of the applicants could have qualified for lower interest rates and closing costs.
Wells Fargo, the first of the lenders to end the litigation, agreed to allow the N.A.A.C.P. to review its lending practices and recommend ways to “improve credit availability to African American and diverse businesses and consumers”...
Kenneth D. Wade, the chief executive of NeighborWorks America, a nonprofit group that assists homeowners, said he supported the N.A.A.C.P.’s contention that many minority borrowers had faced racial discrimination when they applied for loans during the mortgage bubble.
“People of color were disproportionately impacted by the subprime debacle,” he said. “And it’s likely going to result in the largest loss of wealth for African-Americans and Latinos in the country’s history.” ...
Mr. Jealous[, N.A.A.C.P. president,] said he was optimistic that the N.A.A.C.P. would reach similar agreements with Citibank and JPMorgan Chase, which the N.A.A.C.P. is also suing. He added that he also hoped to negotiate such an agreement with Bank of America, which is not part of the lawsuit. “Bankers were using affinity-based marketing — for instance, going into churches and other networks and aggressively marketing,” Mr. Jealous said, and as a result, the borrowers often believed that the lenders’ offers were trustworthy. ...
Brian Kabateck, a lawyer representing the N.A.A.C.P. in its remaining lawsuits,... said he was ... tracking loan modifications. “Blacks are having a harder time keeping their homes,” he said, “and it’s not just related to their ability to pay or not pay.” ...
Sunday, April 11, 2010
Housing prices have been rising lately, but Robert Shiller says "conversations in barbershops and hotel lobbies" could cause housing prices to turn downward:
Don’t Bet the Farm on the Housing Recovery, by Robert Shiller, Commentary, NY Times: Much hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to ... the entire United States economy. But will the recovery be sustained?
Alas, the evidence is equivocal at best. The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. ... So, because home prices have been climbing of late, isn’t it plausible that they’ll keep doing so? If only it were that simple..., we need to worry about strong headwinds, as the government begins to withdraw its support of a still-troubled lending industry and as foreclosures are dumping millions of homes onto the market.
Consider some leading indicators. The National Association of Home Builders index of ... prospective home buyers ... has predicted market turning points... The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.
But why? Unfortunately, it is hard to pinpoint causes... The factors clearly include government economic policy, like interest-rate changes and tax credits. But these moves don’t line up neatly with major turning points in the market.
Sociological processes may be driving these changes. Trends in news media coverage, for example, generate conversations in barbershops and hotel lobbies, which in turn alter the conventional wisdom about investing.
Consider ... the run-up to the 2006 turning point in home prices. In May 2005, two months before the peak in the N.A.H.B. traffic index, Consumer Reports magazine had a cover article ... that conveyed a very bullish sentiment. “Despite years of dire warnings from some economists that the housing boom is about to end, it hasn’t,” the magazine said. “Indeed, last year prices rose even more — about 11 percent nationally.”
The article went on... “If you need a house, and can afford one, go ahead and buy.” The article extended to the housing market the conventional wisdom that then prevailed about the stock market — namely, that it was quite efficient, without identifiable bubbles and bursts. According to this theory, there was an identifiable profit opportunity: buy and hold stocks, and by extension, housing, and watch your wealth grow.
But as 2005 continued, the conventional wisdom began to change..., a public case began to be built that we really were experiencing a housing bubble. By 2006 a variety of narratives, taken together, appear to have produced a different mind-set for many people — creating a tipping point that stopped the growth in demand for homes in its tracks.
The question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise, I don’t believe it has. ... On March 31, the Federal Reserve ended its program of buying more than $1 trillion of mortgage-backed securities, and the homebuyer tax credit expires on April 30.
Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.
Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.
Tuesday, March 30, 2010
Guess I should count myself as lucky -- I'm in a blue dot area. More here:
“Most U.S. metro areas actually experienced more moderate increases in house prices than the nation between 2000 and 2006. In fact, 249 of the 383 metropolitan areas tracked by the Federal Housing Finance Agency saw price increases below the national rate of 8.1% during the boom”... Many of these areas, in turn, didn’t experience the resulting bust.
The authors say a lack of nonprime lending in these areas played a prominent role in insulating them from the boom and bust. “It is likely that causation runs in both directions — an increase in nonprime lending led to more significant home price appreciation [in boom areas], and more rapid home price appreciation led to a rise in nonprime lending”...
Sunday, March 28, 2010
Richard Green is concerned about the old people of the future. Are they saving enough today?:
The long-term impact of the mortgage crisis--and why it keeps me awake, by Richard Green: My parent's generation behaved differently than mine in all sorts of ways. A paper of mine with Hendershott shows that they spent less, controlling for education, etc., throughout their life cycle than any other generation. One of the reasons for this is that they paid off their mortgages. According to the American Housing Survey, 70 percent of households headed by someone over the age of 65 have no mortgage at all. Loan amortization became a mechanism for forced saving, and as a a result, those born during the depression are in pretty decent shape financially. ...
My generation is different. Even under the most benign circumstances, we refinance in a manner that slows amortization. I refinanced ... twice to take advantage of lower interest rates--this was, of course, the right thing to do financially. But each time, the amortization schedule reset, and so it extended the period at which the mortgage would pay off. Now yes, one can take the money one doesn't put into home equity and put it in other savings vehicles, but it is not clear that everyone does that. Forced saving is slowed.
But this is not the worst of how people have handled their mortgages. A substantial fraction of borrowers pulled equity out of their houses, putting themselves on a lower savings path even in the absence of falling house prices.
I am going to run some American housing survey data on this, but it is hard for me to imagine that 70 percent of my generation will have no mortgage debt when we are elders. My parents' generation has used housing wealth to, among other things, finance long-term care. I hope I am missing something here, but the lack of housing wealth in the future could become yet another challenge as we seek to fund the needs of the elderly.
Sunday, March 14, 2010
I think John Stossel should be ignored when it comes to economics, he either doesn't know what he is talking about or he is willing to mislead people. For example, he was still claiming that tax cuts pay for themselves long after it should have been clear to any decent journalist that this was a false claim (he went so far as as late as 2007 -- long after the "Bush tax cuts paid for themselves" myth had been thoroughly debunked -- to say he wasn't sure the Bush tax cuts were desirable since the extra revenue the tax cuts generated will allow government to grow larger).
But whether I think John Stossel and his predictable libertarian views should be ignored or not, people are responding to his latest column claiming that urban sprawl is good (because, to a libertarian, it is very rare that government can improve upon market outcomes no matter how bad the market outcome might be). Richard Green explains how zoning laws discourage mixed use development and promote urban sprawl, and how zoning laws are used to keep the poor from locating in certain areas:
US sprawl is not a market outcome, by Richard Green: A discussion is going around the internet about John Stossel's "libertarian" piece on the virtues of sprawl. John Norquist, on the other hand, labels sprawl a "communist plot," and Matthew Yglesias notes how bulk zoning requirements promote sprawl.
A point John likes to make is sprawl is at least in part the result of government housing finance policy. The New York Times this morning:I.R.S. requirement keeps the agency from acquiring mortgages made in buildings where more than 20 percent of the square footage is commercial — space that is used for, say, a hotel or a doctor’s office.Mixed use development is not going to happen if it can't get financed. Most of Paris, London, large swaths of San Francisco (i.e., some of our best urban places) would not qualify for US housing finance rules. And of course, single use zoning would ban them all.
But most insidious is that zoning is used as a tool to keep low-to-moderate income people out of suburbs. The town next door to mine--San Marino--has zoning requirements so onerous that it is not possible to build small housing there. Even my town, Pasadena, which at least has a bunch of apartments, prevents construction of granny flats on lots smaller than 15,000 square feet. These rules keep out the poor, which reduces expenditures on social services, which makes property values higher, which keeps out the poor, which...
Of course poor people must live somewhere, and so they live in cities with old housing stock that was built before the era of stringent zoning. So cities with old housing stock are placed at a fiscal disadvantage, which induces people with means to leave, which puts them at a greater fiscal disadvantage, etc....
Sunday, March 07, 2010
Robert Shiller says financial engineering can "lead us to a different kind of housing, yet preserve our core values":
Mom, Apple Pie and Mortgages, by Robert Shiller, Commentary, NY Times: For decades, the federal government has subsidized ... owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration ... issuing guarantees ... on most new mortgages.
But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? ...
This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.
In ... 1985..., Kenneth T. Jackson of Columbia University delineated the complex train of thought that ... has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring. ...
In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today. A cardinal tenet is that people should diversify — meaning they shouldn’t put nearly all of their financial eggs in one basket, which is what homeownership now means for so many people.
American mortgage institutions encourage people to take a leveraged position in the real estate market, which is quite risky... Leverage a risky investment 10 to 1 and you can expect trouble — and we have plenty of it today. ...
If we choose to keep subsidizing individual homeownership, we must also commit to adding safeguards so that homeowners are less financially vulnerable. Of course, that will require some creative finance.
But first, we should rethink the idea of renting... Switzerland, for example, is a country with strong patriotism... Yet its homeownership rate is just 34.6 percent, versus 66.2 percent for the United States... Swiss national identity doesn’t depend on homeownership. ... But America isn’t Switzerland. Our values and habits of thought are very different. Moreover, our homes are largely scattered in vast suburbs...
A stock of apartment buildings in central cities, of course, makes rental management much easier. This is true in Switzerland, as well as in American cities like New York, which aren’t typical of the rest of the United States. We need to consider a gradual transition toward new kinds of housing finance institutions — entities that may lead us to a different kind of housing, yet preserve our core values. Although such innovation isn’t likely to end subsidies, it should refocus them on enhancing the qualities of life that we really value.
We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience — and not on efficient-market economics, which disregards human psychology and assumes that our basic institutions are already perfect.
Tuesday, February 02, 2010
Mortgage Choice and the Pricing of Fixed-Rate and Adjustable-Rate Mortgages, by John Krainer, Economic Letter, FRBSF: In the United States throughout 2009, the share of adjustable-rate mortgages among total mortgage originations was very low, apparently reflecting the attractive pricing of fixed-rate mortgages relative to ARMs. Government policy could have changed the relative attractiveness of the fixed-rate mortgages and ARMs, thereby shifting the market share of these two housing finance instruments.
One of the notable features of the current U.S. mortgage market is the predominance of fixed-rate mortgages. The interest rate differential between fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs) has fallen from a recent high of about 2.5 percentage points in the summer of 2004 to about 0.5 percentage point at the end of 2009. These changes in the interest rate differential have coincided with the collapse of mortgage securitizations other than those mediated by government-sponsored enterprises (GSEs), including Fannie Mae, Freddie Mac, and Ginnie Mae (see Krainer 2009). In addition, the Federal Reserve began large-scale purchases of GSE mortgage-backed securities (MBS) starting in January 2009, adding significant secondary market demand for fixed-rate mortgages. The Fed's purchase program has not included MBS containing ARMs.
This Economic Letter reviews some of the factors determining consumer mortgage choices. It shows that ARM share has declined in ways that parallel the behavior of several key mortgage market interest rates. These developments have coincided with, among other things, Fed intervention in the market through large-scale MBS purchases. Thus, the Fed program, while supporting the functioning of the residential mortgage market overall, could have affected the composition of the mortgage market. To help understand this dynamic, this Letter estimates what the ARM share might have been under alternative scenarios in which fixed mortgage rates were higher, which would likely have been the case if the Fed had not been intervening in the market to the extent that it did. ... [continue reading]
Saturday, January 23, 2010
Richard Thaler on walking away:
Underwater, but Will They Leave the Pool?, by Richard H. Thaler, Commentary, NY Times: ...Why is the mortgage default rate so low? After all, millions of American homeowners are “underwater”... Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away...
Some homeowners may keep paying because they think it’s immoral to default. ... But does this really come down to ... morality? A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. ...
That norm might have been appropriate when the lender was the local banker. More commonly these days, however, the loan was initiated by an aggressive mortgage broker who maximized his fees at the expense of the borrower’s costs, while the debt was packaged and sold to investors who bought mortgage-backed securities in the hope of earning high returns, using models that predicted possible default rates.
The morality argument is especially weak in a state like California or Arizona, where mortgages are so-called nonrecourse loans. ... Nonrecourse mortgages may be viewed as financial transactions in which the borrower has the explicit option of ... walking away. Under these circumstances, deciding whether to default might be no more controversial than deciding whether to claim insurance after your house burns down.
In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report..., Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so.
Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.
An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. ... So far, lenders have been reluctant to renegotiate mortgages, and government programs to stimulate renegotiation have not gained much traction.
Eric Posner ... and Luigi Zingales ... have made an interesting suggestion: Any homeowner whose mortgage is underwater and who lives in a ZIP code where home prices have fallen at least 20 percent should be eligible for a loan modification. The bank would be required to reduce the mortgage by the average price reduction of homes in the neighborhood. In return, it would get 50 percent of the average gain in neighborhood prices — if there is one — when the house is eventually sold.
Because their homes would no longer be underwater, many people would no longer have a reason to default. ... Banks are unlikely to endorse this if they think people will keep paying off their mortgages. But if a new wave of foreclosures begins, the banks, too, would be better off under this plan. ...
This plan, which would require Congressional action, would not cost the government anything. It may not be perfect, but something like it may be necessary to head off a tsunami of strategic defaults.
I think that people in non-recourse states understood the option a bit differently. If medical costs wipe you out, if the demand for the widgets you produce falls permanently causing you to lose your job and also have trouble finding a new one, or if other things out of your control cause you to be unable to pay your mortgage, then you won't lose your car, furniture, heirlooms, etc. in a forced liquidation to pay of as much as possible of the remaining balance on the housing loan. Non-recourse protects you fro losing everything. But a change in the price itself wasn't part of the deal. You get to keep the upside, but have to eat the downside - that's how it worked and you knew that going in. At least, that's how I always understood the implicit deal (enforced in part by a fear of losing access to credit in the future, social norms, etc.).
If you were underwater and lost your job and had to move to get a new job, that was one thing, there was little choice but to default and use the protection embedded in non-recourse. But simply walking away when you were still employed and could still afford the mortgage was another. That wasn't the option embedded in the implicit contract. Following this implicit rule lowers costs for everyone, that's the sense in which, contrary to claims above, there's a financial incentive to follow this norm -- should I pay more for my loan so that you can speculate and then walk away from a bad bet (there are unrecoverable costs each time a default is socialized)? That's different than using non-recourse as a form of social insurance against contingencies beyond a household's control, and paying extra closing costs for that insurance.
The change in norm will occur when people begin to believe that they weren't just unlucky, but instead were duped or treated unfairly in some other way. If it wasn't just a bad bet, the kind you reluctantly pay when you lose, but was instead caused by some unfair factor that only becomes evident ex-post, then the norm begins to change as people begin to realize what really happened to them. They don't want to believe or admit to themselves that they were fooled into a loss rather than the victim of a fair bet, but that changes as the losses and resentment mount, and as the evidence that things weren't what they seemed comes into focus. And that does seem to be happening.
Tuesday, January 12, 2010
The housing bubble has precipitated a severe, and possibly catastrophic, economic crisis, so I thought it would be useful to put together a list of pundits and experts who were dead-wrong on the housing bubble. They were the enablers, and deserve to be held accountable. People also need to know (or be reminded of) which pundits/experts should never be listened to again.
The list includes only pundits and (supposed) experts. That means the list doesn't include policymakers such as Alan Greenspan and Ben Bernanke, because however wrong they may have been, policymakers—and especially Fed chairmen—are undeniably constrained in what they can say publicly. I strongly suspect that both Greenspan and Bernanke honestly believed that there was no housing bubble, but alas, we'll never know for sure. The list also doesn't include pundits/experts who were wrong only about the fallout of the collapse of the housing bubble—that is, the extent to which the collapse of the housing bubble would harm the economy.
Many of the names on the list won't shock anyone, I'm sure. And FWIW, a few of the pundits seemed to deny the existence of the housing bubble simply because Paul Krugman argued that there was a housing bubble, and they absolutely hate Krugman. Unfortunately (for our economy), Krugman was right—again. ... [list of dead-wrong pundits/experts]
Monday, January 11, 2010
Richard Green notes another case of conservatives trying to support their ideological preconceptions using evidence that doesn't withstand closer examination. The larger goal here is to pin the blame for the housing crisis on the government, to avoid further regulation of the financial industry, and to reinforce their faith in free markets. The intent is also to pin the blame on Democrats and deflect blame away from deregulation supported by Republicans which, in the view of free market ideologues, could not have been responsible for the crisis:
The biggest stretch I have yet seen for blaming Fannie for the world's problem, by Richard Green: Micky Kaus, who seems to have trouble sleeping at night for fear that some below median income person somewhere might actually benefit from government, attacks Jim Johnson, former CEO of Fannie Mae, for contributing to our current woes.
The problem is that Johnson ran the company from 1991-1998; I am guessing that few mortgages from his tenure are even around anymore, and if any are, their balance is so much lower than the value of the house supporting them (house prices are still much higher than in 1998, and the loan would have amortized a lot), that the incentive to default is non-existent.
Of course, in the piece he approvingly quotes Peter Wallison, an AEI "scholar" who never met a bank he didn't like.
Over the years, Fannie has done plenty of things not to like. But jeez!
Friday, January 08, 2010
Barry Ritholtz emails to say that he disagrees with Paul Krugman's about the importance of lack of regulation in the subprime market in explaining the crisis:
Bubbles & Banks & Zero Lending Standard Loans, by Barry Ritholtz: Paul Krugman has an interesting OpEd in today’s NYT, one that I mostly agree with.
However, I take exception to his perspective on a few issues, one of which might ultimately prove to be crucial to understanding the crisis and putting the correct financial reform measures in place. ... The ... disagreement is over the impact of sub-prime loans on the entire US Housing market, and whether lending standards can be adequately enforced. Had then Fed Chairman Alan Greenspan done his job properly, and prevented Zero Lending Standard loans from infecting the real estate market, we would have been looking at a very different housing situation — to the upside as well as to the down side.
Let’s look at the impact Sub-Prime had, then see what could have been done about it.
First, we need to consider that markets typically are in balance — there are a roughly equal number of buyers and sellers. ... What happens when you drop mortgage rates significantly? Monthly carrying costs become lower, and this attracts more marginal buyers (demand) — at least until prices rise to the point where the balance between buyers and sellers stabilizes prices once more.
Without the explosion of subprime, but with ultra low rates, we very likely would have seen a rise in housing prices, followed by a plateau. But it would not have been nearly as severe relative to historic price relationships (as an example, median income to median home price).
What the newfangled lend-to-securitize subprime model did, however, was to bring millions of previous non-buyers — people otherwise known as renters — into the housing market. On top of the rise in prices caused by 1% Fed Funds rates (~6% mortgages), this added an additional level of pricing destabilization to the Real Estate market.
This is evident in the charts I’ve shown again and again: Median income to median home price; cost of renting to ownership; Housing stock as a percentage of GDP — all of these showed a housing market several standard deviations above its historic pricing mean.
With that in your mind, consider how this sub-prime driven boom played into the securitization market, and eventually the Derivatives market (CDOs, CDSs, etc). Look at the 10 steps detailed here on Monday regarding the forming of the credit crisis.
The inevitable conclusion is that sub-prime was a major driver of not only the Housing boom and bust, but of the entire financial crisis and credit freeze, and the subsequent bailouts . . .
Could it have been prevented? Only if the Fed would have enforced traditional lending standards, i.e., the borrowers ability to service the mortgage. They should have regulated those non-bank lenders whose model was based not upon the borrowers ability to service these loans, but upon the lender’s ability to subsequently sell the loan off top securetizers on Wall Street.
So, the answer is yes, appropriate regulation could have prevented the entire mess . . .
But the loan originators would not have made the subprime loans without the confidence that the securitizers would take them off their hands. So even if regulation failed as a first line of defense, and it did, I still think you have to ask (and understand) why securitizers were so willing to take this paper from the loan originators. What went wrong in their assessment of the risks of buying the securitized loans? Here, failures of the ratings agencies and the mathematical models or risk assessment both played a role, as did the feeling that this time was different so prices would continue to rise. Confidence among some investors that even if there was a bubble, once things turned downward they could get out of the market before realizing big losses was also a factor.
The point is that there wasn't just one failure at work, there were multiple lines of defense, any one of which could have prevented the bubble or made its consequences much less severe, that broke down. As I've said before, when I look at these markets, I see regulatory failures, market failures, and other problems creating bad incentives at just about every stage in the process. Home buyers, real estate agents, appraisers, mortgage brokers, securitizers, ratings agencies, compensation packages of executives, lack of transparency, and so on and so on all broke down and allowed the housing/credit bubble to inflate. If any one of these groups had held the line and not gone along with everyone else, e.g. if appraisers had not reported bubble prices, if ratings agencies had priced risk correctly, etc., then the bubble either doesn't happen at all, or does much less damage when it pops.
The problems in these markets were systemic. Maybe we can target one area, e.g. the regulation of subprime loans, and insulate the system going forward. But my view is that broad based failures require broad based solutions. That's why rather than trying to fix each problem individually, I've advocated solutions such as limiting leverage ratios that will insulate the system from large breakdowns in the event that another bubble occurs. Yes, we should try to fix all the individual problems that we can, including regulatory failures at each stage of the home loan process. But we shouldn't rest after that since that may not be enough to prevent bubbles in the future. We also need to do the things necessary to make the system much less vulnerable to a crash when the next one occurs (and it will).
Wednesday, December 23, 2009
"I meant what I said and I said what I meant, an elephant's faithful, 100 percent":
Everyone's Defaulting, Why Don't You?, by Daniel Gross, Commentary, Slate: Strategic defaults—...people who could continue to make payments on ... their homes deciding to walk away...—are rising. According to the Wall Street Journal, strategic defaults are likely to exceed 1 million in 2009. This is making some worry about the very future of capitalism. Georgetown University business ethics professor George Brenkert told the Journal that borrowers who can afford to stay current are morally required to do so, and that were Americans to conclude they could just walk away from obligations, it would be disastrous. ... Megan McArdle expressed disdain for people who chose to indulge themselves on consumer goods and services while not keeping current with their mortgages.
Um, do any of these people read the Wall Street Journal? Strategic defaults are the American way... Deep-pocketed companies, billionaires, and institutions that can afford to stay current on payments strategically default all the time.
Morgan Stanley, for example, is a gigantic corporation. As of the second quarter, it boasted total capital of $213.2 billion. It certainly has the ability to make good on obligations... But earlier this month Morgan Stanley said it would turn over five San Francisco office buildings to lenders rather than pay the debt on them. Why? ... "This isn't a default or foreclosure situation," spokeswoman Alyson Barnes told Bloomberg News. "We are going to give them the properties to get out of the loan obligation." Smells like a strategic default to me.
It's not just happening in real estate. According to Standard & Poor's, through Dec. 18, 262 corporations had defaulted on bonds they had sold to the public, twice the total of 2008 and "the highest default count since our series began in 1981."... Sometimes companies default on these bonds because they're broke (see: Lehman Bro.). But sometimes they simply default because they don't want to pay out for them. Investors and managers, who have spent hundreds of millions of dollars on personal toys, aircraft, headquarters buildings, and compensation, simply can't seem to find the cash to stay current on debts. ...
There's no doubt that homeowners are defaulting strategically. And the surprise may be that, given market conditions, there aren't more strategic defaults. A paper by University of Arizona law professor Brent White suggests that bourgeois values are actually keeping people from walking away from bad home loans. Most people underwater on their mortgages stay current "as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure's perceived consequences." In addition, he notes, societal norms push individuals "to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision."
Of course, corporate managers and financiers don't suffer from these neuroses. Do you think billionaire investor Sam Zell feels any guilt or shame because his buyout of the Tribune Co., which had $12.9 billion in debt, ended in a Chapter 11 filing...? Rather than worry about whether Americans will take cues from modest homeowners who make a tough decision not to stay current on debt, perhaps we should worry about middle-class Americans taking cues from billionaires and Fortune 500 companies...
Monday, November 23, 2009
At MoneyWatch, some brief comments (and links to other discussions by Calculated Risk, The Big Picture, and Free Exchange) on today's news that existing home sales rose 10.1 percent in October:
Wednesday, November 18, 2009
I just posted this at MoneyWatch:
Housing starts fell unexpectedly last month. The Census report gives the details:
Privately-owned housing starts in October were at a seasonally adjusted annual rate of 529,000. This is 10.6 percent (±8.7%) below the revised September estimate of 592,000 and is 30.7 percent (±8.3%) below the October 2008 rate of 763,000.
Single-family housing starts in October were at a rate of 476,000; this is 6.8 percent (±7.5%)* below the revised September figure of 511,000. The October rate for units in buildings with five units or more was 48,000.
This graph shows the recent trend in housing starts:
As the graph shows, starts bottomed several months ago, and have been "moving sideways" ever since. What is causing housing starts to move sideways rather than recover? Calculated Risk, one of the best sites for analysis of the housing industry, gives this explanation (which I agree with):
Total housing starts were at ... the all time record low in April of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have move sideways (or down) for five months.
Single-family starts were at 476 thousand (SAAR) in October... Just like for total starts, single-family starts have been at this level for five months.
As he notes, an important piece of the puzzle is that the percentage of vacant units has been climbing and is now at a record level (see this report):
It is very unlikely that there will be a strong rebound in housing starts with a record number of vacant housing units.
The vacancy rate has continued to climb even after housing starts fell off a cliff. Initially this was because of a significant number of completions. Also some hidden inventory (like some 2nd homes) have become available for sale or for rent, and lately some households have probably doubled up because of tough economic times.
It appears that ... starts are now moving sideways - and will probably stay near this level until the excess existing home inventory is reduced.
This raises the question of whether the overall economy will echo this pattern of falling backwards after apparent improvement, i.e. of moving sideways for a period of time. This is something I don't think we can or should rule out as we think about the appropriate economic policies that we should have in place to help the economy recover from the recession.