Tuesday, April 13, 2010
Illustrious economist and New York Times columnist Paul Krugman has directed his learned attention toward the failure of small banks in Georgia. Why? Embarrassingly enough, it's because Georgia leads the nation in bank failures, and the majority of those banks are small.
Georgia is part of what Krugman charmingly labels "Flatland" - where "permissive zoning and abundant land make it easy to increase the housing supply, a situation that prevented big price increases and therefore prevented a serious bubble." In most of Flatland, by Krugman's reckoning, no housing bubble means fewer bad mortgages means fewer bank failures. No so in Georgia.
Georgia’s debacle is that it doesn’t seem to have anything to do with the issues that have dominated debates about banking reform. For example, many observers have blamed complex financial derivatives for the crisis. But Georgia banks blew themselves up with old-fashioned loans gone bad.
And for all the concern about banks that are too big to fail, Georgia suffered, if anything, from a proliferation of small banks. Actually, the worst offenders in the lending spree tended to be relatively small start-ups that attracted customers by playing to a specific community. Thus Georgian Bank, founded in 2001, catered to the state’s elite, some of whom were entertained on the C.E.O.’s yacht and private jet. Meanwhile, Integrity Bank, founded in 2000, played up its “faith based” business model — it was featured in a 2005 Time magazine article titled “Praying for Profits.” Both banks have now gone bust.
So what’s the moral of this story? As I see it, it’s a caution against silver-bullet views of reform, the idea that cracking down on just one thing — in particular, breaking up big banks — will solve our problems. The case of Georgia shows that bad behavior by many small banks can do as much damage as misbehavior by a few financial giants.
Krugman's formula for reform in Georgia is better protections against predatory lending. Former Democratic Governor (and predatory lending lawyer) Roy Barnes tried hard for those protections when he was in office, only to have them later rolled back. Will this latest crisis change that calculation? Probably depends on the next governor, who might be - Roy Barnes. Predictions about how that race might come out are probably beyond even Krugman's prognosticating skills.
Jamie Baker Roskie
Saturday, April 10, 2010
Robin Paul Malloy (Syracuse) has posted Mortgage Market Reform and the Fallacy of Self-Correcting Markets, Pace Law Review, Vol. 30, p. 79 (2009). The abstract:
The article discusses the mortgage market collapse in connection to the broader financial crisis. In developing the argument I proceed in several steps. First, I discuss the fallacy of self-correcting markets as a way of explaining the need for volitional and purposeful regulation in the housing and mortgage markets. This involves explaining that markets are not self-correcting; while Alan Greenspan and company waited for the invisible hand to appear and correct the mortgage markets, the system collapsed. Second, I provide an overview of the basic exchange relationships among the parties involved in the underlying real estate transaction, those in the primary and secondary mortgage market, and potential investors in mortgage related securities. Third, I explain the inapplicability of Hernado DeSoto's idea of parallel lives between underlying real estate transactions and the market for securities based on the mortgages in these underlying transactions. And, fourth, I suggest a series of regulatory and transactional reforms to consider for improving the soundness of the underlying real estate transaction and the operation of the primary mortgage markets. These reforms include: taking steps to reduce speculation in housing prices; eliminating incentives for over borrowing and over lending; and, adjusting the structure of the underlying real estate transaction to undermine an inverse prisoner’s dilemma problem. I also suggest that lawyers reassert themselves into doing basic real estate transactions and that real estate sales people and others be restricted to simply doing the sales work that they are trained to do.
Wednesday, April 7, 2010
Luigi Zingales (U. Chicago--Business) has an interesting article in the latest City Journal called The Menace of Strategic Default: Homeowners who walk away from their mortgages undermine our financial system. The idea of "strategic default" is that it might be economically rational for owners of underwater mortgages--where the debt owed is greater than the market value of the home--to walk away, even if they can in fact afford to keep making payments. Zingales looks at the numbers and surmises that while still low, the number of such "strategic defaults" is on the uptick. He posits that the only thing preventing a mass movement of strategic defaults is the lingering American normative disapproval of failing to pay debts:
What does prevent people from strategic default, it seems, is their sense of what’s right. More than 80 percent of Americans think that it’s immoral to default on a mortgage if you can afford to pay it, according to a recent paper by Luigi Guiso, Paola Sapienza, and myself, and these people are 77 percent less likely to declare their intention to default strategically than people who don’t find the act immoral.
Zingales is concerned that a breakdown of this social norm could put the entire system at risk.
How much risk? If the underwater homeowners who currently refuse to default changed their minds and decided to abandon their mortgage commitments, the results could be catastrophic. The more people walk away, the more houses get auctioned off, further depressing real-estate prices. This additional decline would push more homeowners into negative territory, leading to still more defaults.
To prevent the catastrophe resulting from such a normative breakdown, Zingales and Eric Posner offer a proposal:
Eric Posner and I have proposed a simple solution to the problem of underwater mortgages. We envision a reform of the bankruptcy code that, in areas where house prices have dropped precipitously, would require lenders to give homeowners the option of resetting their mortgages to the current value of their houses. In exchange, the lenders would get 50 percent of the houses’ future appreciation.
Interesting analysis; read the whole thing.
Sunday, April 4, 2010
Irwin Stelzer has a column in the business section of the Sunday Times Online (UK) called Housing market could spoil the recovery party. He begins on a positive note:
The gloom is dissipating. The jobs market is improving: 162,000 new jobs were created in March. Factor out the 48,000 hired temporarily to help with the census, and you still have positive growth. Employment in the hard-hit construction industry — which lost 864,000 jobs in the past 12 months — held steady, while jobs were added in manufacturing, mining, healthcare and temporary services.
He goes on to analyze some other signs of hopefulness for the economy. But it isn't all good news, because of that pesky US housing market. Responding to several signals of an uptick in investor confidence in the real estate sector, Seltzer cautions:
They may be in for an unpleasant surprise. New home sales are still lagging, the supply of unsold homes remains high, the tax credit for first-time buyers expired last week, at the same time as the Federal Reserve Board discontinued its $1.4 trillion programme to purchase mortgage-backed securities. The housing market is key to creating construction jobs, and all the jobs that go with furnishing a home.
If these headwinds prove too strong, the arrival of spring will see the bears emerge from hibernation, especially if the recovery proves to be only “a sugar high” based on unsustainable government spending and low interest rates, which the bond vigilantes will, sooner rather than later, drive up.
It was the real estate boom that helped cause the economic crisis, and now it might be the real estate bust keeping things slow.
Thursday, March 11, 2010
Atlanta added 1.13 million people from 2000 to 2008, more than any other in the country except Dallas. But from 2005 to 2009, the number of annual building permits fell by 66,352, the biggest decline in any metropolitan area.
Will Atlanta continue to emerge as a mighty metropolitan economy, or will the housing downturn turn the area into a place that might have been?
After a succint review of Altanta's history as a city, Glaeser observes that growth policies and housing have been key to Atlanta's late-20th Century success:
Housing supply, not quality of life, has been the crucial helpmate of economic convergence. Atlanta has kept housing prices low, despite a vast increase in its size, because there are few natural or legislative limits to new construction.
The city was built in the middle of the state with neither mountains nor an ocean to block its growth. The dominant political players have long been pro-growth, and as a result, much of suburban Atlanta is a paradise for builders. The resulting low home prices have helped bring millions to the region.
Glaeser concludes that despite some of the economic problems that are currently plaguing sun-belt boom cities, Altanta's future may be bright, for three reasons: (1) its position as the dominant city in the region; (2) companies will continue to find its pro-business policies to be hospitable; and (3) it maintains a highly skilled population, with 43 percent of its adults holding college degrees (well above the national average and even higher than places like Boston (41%)). The next decade or so might be revealing about the long-term sustainability of the prevailing models of growth and land use in post-WWII America.
Thursday, February 11, 2010
From today's NYT Opinionator Blog, a piece on what's happend in California - the unregulated sprawl in the Central Valley vs. the strictly regulated urban core:
It hasn’t happened. Just the opposite. The developers’ favorite role models, the laissez faire free-for-alls — Las Vegas, the Phoenix metro area, South Florida, this valley — are the most troubled, the suburban slums.
Would stricter land use regulation kept us out of this mess?
Jamie Baker Roskie
Tuesday, February 9, 2010
Dan Immergluck (Georgia Tech--School of City and Regional Planning) has posted From Global Buck to Local Muck: Capital Markets, Public Policy and Neighborhood Wreckage in the U.S. The abstract:
The U.S. subprime crisis was the result of a continual movement of U.S. mortgage markets towards vertical disintegration, structured finance, and deregulation since the early 1980s. The result was an increasingly direct connection between global capital markets and U.S. homeowners and neighborhoods, with little mediation, oversight or restraint, especially by the public sector. There was no concern with the consequences that high-risk lending might have on local communities and their residents; the focus was on promoting liquidity at all costs, to increase the transactions (and the associated profits) and continue to promote financialization of the economy.
The impacts of the subprime crisis, both direct and indirect, are far too vast and widespread to be addressed in a single paper. However, I attempt here to describe one critical aspect of this impact - the piling up of vacant, foreclosed properties in many U.S. neighborhoods, especially those in older central cities as well as those in newer, outlying suburban and exurban communities in some parts of the country. I also discuss the primary federal response to the problem of vacant, foreclosed properties, the Neighborhood Stabilization Program, which was adopted initially in the summer of 2008, with supplemental funding in 2009.
UPDATE: I originally posted that Prof. Immergluck was at Georgia State, not Georgia Tech. Since I started my academic career in Georgia, I should know the difference! I remain an admirer of all of those great institutions.
Thursday, February 4, 2010
I'm just now getting around to posting a link sent to me by Kermit Lind from Cleveland State's Urban Development Law Clinic. The page contains materials from their (fairly) recent Public Nuisance CLE. Professor Lind hopes this information will be helpful to others engaged in nuisance abatement and code enforcement in the context of the mortgage crisis. CSU's clinic has done a lot of interesting an innovative work in the context of a contracting urban center. I hope we'll be able to persuade Prof. Lind and his colleague Professor Carol Heyward to share more about their work.
Jamie Baker Roskie
Friday, January 29, 2010
The President announced $8 billion in grants for various regional high-speed rail initiatives around the country, under the auspices of the American Reinvestment and Recovery Act. The White House press release is here.
Tampa, FL – President Barack Obama and Vice President Joe Biden will today announce that the U.S. Department of Transportation (USDOT) is awarding $8 billion to states across the country to develop America’s first nationwide program of high-speed intercity passenger rail service. Funded by the American Recovery and Reinvestment Act (ARRA), these dollars represent an historic investment in the country’s transportation infrastructure, which will help create jobs and transform travel in America. The announcement is one of a number of job initiatives the President will lay out in the coming weeks that follow up on the continued commitment to job creation he discussed in last night’s State of the Union Address.
What's kind of interesting, if you read the press release, is that it focuses on jobs, economic impact, and more jobs . . . much more so in my opinion than did the DOT/Federal Railroad Administration "Vision for High Speed Rail in America" strategy document from last year, which focused more on the inherent urban/land use/environmental benefits of moving America toward high speed rail.
DOT Secretary Ray LaHood says that President Obama delivers on American High-Speed Rail on his Fast Lane Blog. You can also check out the ARRA list of to-be-funded HSR projects.