Thursday, August 26, 2010
The question of what to do about Fannie Mae and Freddie Mac -- the two government-created enterprises that have backed massive loans to the housing market -- involves much more than finance or real estate. It marks the end of an era. The relentless promotion of homeownership as the embodiment of the American dream has outlived its usefulness. . . .
Unfortunately, we let a sensible goal become a foolish fetish.
Samuelson goes on to critique the Fannie/Freddie story but pulls back from the precipice of radical reform in conclusion:
"This is not a good time to make permanent solutions for housing," says Guy Cecala, publisher of Inside Mortgage Finance. The single-minded promotion of homeownership failed and, paradoxically, undermined the American dream. It contributed to the housing "bubble" and favors housing investment over new industries and technologies. But to end it, we need to make haste slowly.
Saturday, August 14, 2010
I really enjoyed reading the article linked in Chad's post yesterday, and the good points in the comments so far. I've linked or mentioned a few times about the need to rethink housing policy with respect to the primacy of homeownership. But with all the talk in the article and elsewhere of reforming or replacing Fannie and Freddie, there is talk in the wind of a different plan: a Fannie-Freddie Bailout.
James Pethokoukis, the Reuters money & politcs blogger, wrote recently about such a bailout as an August Surprise:
Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:
Then a couple of days ago the Boston Globe published an op-ed by Paul McMorrow titled One More Bailout.
WHEN PRESIDENT Barack Obama signed legislation overhauling the nation’s financial regulations last month, he declared an end to Wall Street bailouts. Going forward, he said, failing finance houses won’t skirt by on the taxpayers’ dime. Bay State Representative Barney Frank characterized the new law as a death penalty for reckless institutions.
Both men are only half right. Congress has one more bailout to complete. That job — bringing Fannie Mae’s and Freddie Mac’s toxic balance sheets onto the government’s ledger — was left out of last month’s financial overhaul because the job is so massive and so politically unpalatable that it dwarfs every record-breaking handout that came before it.
That approach is also the only realistic option on the table.
Next Tuesday, policymakers will convene a summit to help determine what to do with Fannie and Freddie, the two government-owned mortgage giants. It’s bound to conclude that there’s little to do but nationalize them, stuff them with $300 billion in taxpayer funds, and hope that when they’re eventually able to stand on their own as semi-private corporations, the nation’s economy doesn’t implode again.
We'll we're certainly seeing mixed signals in the air about the future of housing, real estate, and land use in public policy and finance. Keep your eyes on Tuesday's Treasury meeting
August 14, 2010 in Affordable Housing, Budgeting, Federal Government, Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)
Tuesday, August 10, 2010
James Charles Smith (Georgia) has posted The Structural Causes of Mortgage Fraud, forthcoming in the Syracuse Law Review, Vol. 60. The abstract:
I saw Prof. Smith present an early version of his research on mortgage fraud last year; he announced "tentatively, I'm against it." That cracked me up. Anyway, check out the paper.
Friday, August 6, 2010
Lee Anne Fennell (Chicago) and Julie Roin (Chicago) have posted Controlling Residential Stakes, University of Chicago Law Review, Vol. 77, p. 143 (2010). The abstract:
As you might expect, this looks like a very interesting and important paper.
August 6, 2010 in Finance, Housing, Landlord-Tenant, Local Government, Mortgage Crisis, Mortgages, NIMBY, Property Theory, Real Estate Transactions, Scholarship, State Government | Permalink | Comments (0) | TrackBack (0)
Wednesday, August 4, 2010
Richard D. Marsico (New York Law School) has posted Looking Back and Looking Ahead as the Home Mortgage Disclosure Act Turns Thirty-Five: The Role of Public Disclosure of Lending Data in a Time of Financial Crisis, published in the
Tuesday, July 13, 2010
On The New Republic's excellent "The Avenue" blog, Christopher Leinberger (author of The Option of Urbanism) discusses a recent Brookings debate with Joel Kotkin (author of The Next Hundred Million: America in 2050). From Walking--Not Just for Cities Anymore, Leinberger notes:
I just had a debate with Joel Kotkin, whom many consider to be an apologist for sprawl. Surprisingly, there is a convergence between his view of the next generation of real estate and infrastructure development and mine: a constellation of pedestrian-friendly urban development spread throughout metropolitan areas, redeveloping parts of the central city and transforming the inner, and some outer, suburbs. There are certainly differences between the two of us: I happen to see significant pent-up demand for walkable urban development and massive over-building of fringe car-oriented suburban housing and commercial development.
In fact, I see compelling evidence that the collapse of fringe drivable suburban markets was the catalyst for the Great Recession, and the lack of walkable urban development due to inadequate infrastructure and zoning is a major reason for the recovery’s sluggishness. Joel feels the demand for walkable urban development is a fraction of the future growth in households. I think rail transit, biking and walking infrastructure are crucial to make this walkable urban future happen; Joel thinks bus rapid transit is as far as we have to go in the transit world… making cars more technologically efficient is his main answer.
I have been hoping that Leinberger will prove correct about his belief in the untapped market demand for walkable urbanism, which has not persuaded Kotkin and other critics. Leinberger concludes:
We need move away from 20th century concepts that confuse the conversation. If I am right, 70 to 80 percent of new development should be in walkable urban places, and my research leads me to think the majority of that development will be in the suburbs.
July 13, 2010 in Density, Development, Downtown, Exurbs, Financial Crisis, Local Government, Mortgage Crisis, New Urbanism, New York, Pedestrian, Planning, Sprawl, Urbanism, Zoning | Permalink | Comments (0) | TrackBack (0)
Wednesday, June 30, 2010
Susan E. Hauser (North Carolina Central) has posted Cutting the Gordian Knot: The Case for Allowing Modifications of Home Mortgages in Bankruptcy, J
Wednesday, June 23, 2010
Richard Florida, one of the leading public intellectuals on the future of cities and the originator of the "Creative Class" concept, had an interesting article in the Wall Street Journal last week: Homeownership is Overrated: Today's economy requires a more mobile workforce. After acknowledging the important role that homeownership has played in cultural conceptions of the "American Dream" for the last several generations, Florida critiques the norm:
Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery. My colleagues and I tracked homeownership levels across U.S. cities and regions to see how they correlate to other measurable demographic and economic factors. As we expected, the rates of homeownership are greatest where housing prices are lowest. But cities with high levels of homeownership—in the range of 75%, like Detroit, St. Louis and Pittsburgh—had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can't sell, unable to move on to new centers of opportunity.
Now I think there are two different questions here that Florida doesn't distinguish: (1) whether homeownership is good for individual homeowners; and (2) whether it is good for society at large. But Florida makes some excellent points. He goes on to make a policy prescription that I think is long overdue, particularly from the left:
First and foremost, the Obama administration should end its ongoing measures to prop up the housing market. The massive federal subsidies for homeownership, which totaled some $230 billion in 2009 according to the Congressional Budget Office, should be phased out, and the tax deduction for mortgage interest eliminated.
The next critical step is to encourage the transition to more and better rental housing. Multifamily housing is one of the few profitable bright spots in a ravaged housing industry. There are thousands upon thousands of unsold condos and foreclosed homes that can and should become rentals.
Florida concludes with a much-needed questioning of the cultural assumption that property ownership is the sine qua non of the "American Dream":
A "home of one's own" has been the emblem of prosperity and stability for a very long time. The idea is rich with psychological and cultural significance, but we have come to an economic juncture where we must re-examine even our most cherished beliefs. We can begin by updating our definition of the American Dream.
Before the recession, people simply looked for a house to buy. Later they got squeamish just thinking about buying. Now they are on a quest for perfection at the perfect price. . . .
It is a reversal of roles from the boom, when competing buyers were sometimes reduced to writing heartfelt letters saying how much they loved the house and how they promised to eternally worship the memory of the previous owners. These days, it is the buyers who are coldly seeking the absolute best deal while the sellers are left in emotional turmoil.
“We see buyers who must have learned their moves from the World Wrestling Federation,” said Glenn Kelman, chief executive of the online broker Redfin. “They think the final smack-down occurs at the inspection, where the seller will be reluctant to refuse any demand because the alternative is putting the house back on the market as damaged goods.”
Everyone expected the housing market to suffer at least a temporary hangover after the government’s $8,000 tax credit expired, but not necessarily this much. Preliminary data from around the country indicates that the housing market began swooning last month immediately after the credit was no longer available. In some places, sales dropped more than 20 percent from May 2009, when the worst of the financial crisis had subsided.
Bad news for the housing and construction industries, and a possible signal of a double-dip recession. I think that last part about the $8000 tax credit is telling. Once again, the market for housing was artificially propped up by a policy decision to promote home ownership.
Mark S. Scarberry (Pepperdine) has posted a Reply to Adam Levitin's Response to Scarberry's Symposium Article (which was itself a "Critique"Levitin's work)--ok, I think I have that straight. At any rate, it's a very interesting and important debate. Scarberry's Reply is Mortgage Wars Episode V - The Empiricist Strikes Back (or Out): A Reply to Professor Levitin’s Response, and is published at Pepperdine Law Review, Vol. 37, p. 1277, 2010. The abstract:
Professor Adam Levitin has responded to my recent symposium article critiquing proposed congressional legislation that would allow modification (including strip down) of home mortgages in Chapter 13 bankruptcy. A portion of my Critique criticized his empirical studies concerning the likely effect of the proposed legislation on mortgage interest rates and availability, and also criticized the arguments he has made in support of the proposed legislation. The Critique did note, however, that the insight involved in conceiving of such empirical studies was impressive.
Surprisingly, Professor Levitin’s Response fails to deal with the substantial case authority discussed in my Critique. He treats the Critique’s case authority on a critical question as if it consisted only of one relatively recent Ninth Circuit case and supposed dicta from an “old” Second Circuit case. But the Critique in fact relies on about twenty cases that deal with the question; the only supposedly contrary case authority he discusses in his Response turns out to be one of the cases cited in my Critique and not to be contrary at all. The case authority shows that the main defense put forward in his Response - that the mortgage modifications that would be permitted under the proposed legislation are similar to those permitted before the Supreme Court’s 1993 Nobelman decision and similar to those currently permitted where the collateral is not the debtor’s principal residence - is simply untenable.
It is also surprising that the entire weight of his defense of the empirical studies rests (A) on a very likely mistaken view of the law - that the law permits Chapter 13 debtors to use a novel, flawed approach in modifying secured claims under current law - and (B) on two remarkably bold and implausible assertions regarding how the market data he collected supposedly should have reflected the risk that debtors might use that novel, flawed approach, even though his data was collected before anyone had suggested that debtors might even try to do so. In addition, one of Professor Levitin’s assertions, if accepted, would fatally undermine
the design of a key part of his empirical studies.
The article notes in conclusion that law professors and others who have taken divergent positions on the wisdom of the congressional proposals might yet be able to agree on a common-sense middle ground; there is no need to consider those who disagree with us as having been seduced by the Dark Side.
The citation for my Critique is Mark S. Scarberry, A Critique of Congressional Proposals to Permit Modification of Home Mortgages in Chapter 13 Bankruptcy, 37 Pepp. L. Rev. 635 (2010). The Critique is available at http://ssrn.com/abstract=1520794. The citation for Professor Levitin’s Response to the Critique is Adam J. Levitin, Back to the Future with Chapter 13: A Response to Professor Scarberry, 37 Pepp. L. Rev. 1261 (2010). His Response is available at http://ssrn.com/abstract=1534912. The citation for this Reply is Mark S. Scarberry, Mortgage Wars Episode V - The Empiricist Strikes Back (or Out): A Reply to Professor Levitin’s Response, 37 Pepp. L. Rev. 1277 (2010).
I appreciate Prof. Scarberry including the citations to the other articles in the debate in his abstract--saves me a lot of work! More importantly, this dialogue addresses one of the key issues in the mortgage crisis.
Monday, June 21, 2010
Over the weekend this story by Binyamin Applebaum was featured on the front page of the New York Times: Cost of Seizing Fannie and Freddie Surges for Taxpayers.
CASA GRANDE, Ariz. — Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords. . . .
For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The Congressional Budget Office predicts that the final bill could reach $389 billion.
The article has some good vignettes of how the Fannie-Freddie "rescue" process is playing out in communities like the featured one in Arizona, where private contractors are paid to maintain, renovate, and try to resell the foreclosed homes. The article also gives a short but interesting background on Fannie and Freddie.
Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors. . . .
“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. Here in Arizona, during a housing boom fueled by cheap land, cheap money and population growth, Fannie Mae executives trumpeted that the company would invest $15 billion to help families buy homes.
As it turns out, Fannie and Freddie increasingly were channeling money into loans that borrowers could not afford. As defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid.
The huge and continually rising cost of that decision has spurred national debate about federal subsidies for mortgage lending. . . .
I think the interesting question for the future is whether we are willing or able to reassess the idea of homeownership as the American Dream, and the extent to which we (over)promote homeownership as a public policy.
Saturday, June 12, 2010
Lee Anne Fennell (Chicago) has posted Possession Puzzles, delivered originally as the Wolf Family Lecture on the American Law of Real Property at Florida, to be published in POWELL ON REAL PROPERTY, Michael Allan Wolf, ed., 2010. The abstract:
Sunday, May 30, 2010
Wednesday, May 19, 2010
Next month the American Association of Law Schools will have its mid-year meeting in New York, and one of the three primary subject matter workshops this year is the Workshop on Property, June 10-12. There will be a terrific program focusing on the property law implications of two major issues: the mortgage crisis, and global warming. Check out the brochure. From the write-up:
Why Attend? Two major crises in the last few years have exposed deep tensions and pressures on our understanding of property law. The foreclosure of more than 2 million homes, and the anticipated default of another 6 million mortgages has shaken common notions about the ability of consumers to understand real estate transactions and the terms of their mortgage contracts, posed stark questions about the failure of the law to limit the ability of the market to produce property transactions that created significant principal/agent costs, moral hazards, and externalities, and presented challenging questions about racial disparities in access to prime credit and in the underwriting of troublesome new mortgage products. Similarly, vigorous debates over the responsibility of industrialized countries to control global warming, the need to protect future generations from the effects of global warming, and the fair allocation of the burdens of reducing greenhouse gases similarly have posed challenging questions about the regulation of risk from activities on private property, the nature of property owners’ obligations to future generations, and the failure of regulation to control externalities from the use of property. Both crises raise serious theoretical and practical challenges to traditional notions about the comparative advantages of the free market, our ability to craft property laws that limit systematic risk without unduly discouraging innovation, and the continuing inability of the law to prevent racial discrimination, exclusion and exploitation. . . .
Who Should Attend? This workshop should be of interest to teachers of Property Law, Real Estate Transactions, Land Use Law, Environmental Law, Natural Resources, Indian Nations and Indigenous Peoples, Regulation, Financial Instruments, and Law and Economics. The workshop is designed to benefit property law teachers at all levels of experience. Our speakers and group leaders will include many of the most prominent and established people in the field, and also a substantial number of newer voices.
The early bird registration deadline is this Friday, May 21. See the website to register. Hope to see you all there!
May 19, 2010 in Climate, Conferences, Environmental Law, Financial Crisis, Mortgage Crisis, New York, Property, Real Estate Transactions, Scholarship, Teaching | Permalink | Comments (0) | TrackBack (0)
Sunday, May 9, 2010
Eric S. Belsky (Harvard--Joint Center for Housing Studies & Graduate School of Urban Design) and Susan M. Wachter (Penn--Wharton, Real Estate) have posted The Public Interest in Consumer and Mortgage Credit Markets. The abstract:
Wednesday, May 5, 2010
Christopher E. Herbert (Abt Associates, Inc.) & William C. Apgar (Abt Associates, Inc.) have posted Report to Congress on the Root Causes of the Foreclosure Crisis. The report appears to be the official report to Congress by HUD's Office of Policy Development & Research, based on a draft by the two authors as contractors. The abstract:
Monday, May 3, 2010
Claire A. Hill (Minnesota) has posted Who Were the Villains in the Subprime Crisis, and Why it Matters, forthcoming in Ohio Entrepreneurial Business Law Journal, Vol. 4, p. 323, 2010. The abstract:
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.