Tags: Housing

CRA and Risky Lending


I had assumed that the effects of the Community Reinvestment Act were overstated by its critics. This is one of those times when I do not mind being wrong:

Did the Community Reinvestment Act (CRA) Lead to Risky Lending?


Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.


There is a great deal of interesting information in the paper, which you can read here. (What, this isn’t what you do with your Christmas break?)

Tags: Housing

Real-Estate Roulette


Foreclosures are down year-over-year but spiked sharply in May — up 9 percent. Both home sales and prices have recovered a bit recently, both up about 10 percent year-over-year. What seems to be happening is that a great number of foreclosures that were delayed in the past year are now getting under way as lenders begin to figure out how to prove that they own mortgages in default, having fecklessly failed to do so previously.

As usual, politics is making things worse, extending the problem rather than mitigating it. Nevada’s anti-foreclosure law, for instance, which increases documentation requirements, seems to be effective mainly in lengthening the foreclosure process, rather than in keeping people in their homes. (Though there is no excusing the mortgage industry’s shockingly shoddy documentation process.)

More houses going into foreclosure will put downward pressure on prices, because banks don’t like to be homeowners, and consequently dump properties ASAP. Bank-owned homes sell for a third less than other houses.

The underlying problem, as ever, is negative equity — which is increasing, in spite of all of the political attention focused on the problem. This has had some perverse consequences. A great deal of those recent gains in house prices have occurred at the bottom end of the market, where there is the highest level of negative equity. Simply put, people with significant negative equity can’t really sell their houses, so the number of low-end houses on the market has decreased, driving up prices for the remaining inventory. But negative equity also correlates with mortgage default. So a significant rise in housing prices could draw a lot of new product onto the market, possibly reversing recent housing gains, while a significant economic downturn — say the result of a worldwide financial crisis resulting from the collapse of European financial institutions — could send a lot of borrowers into default and houses into foreclosure. And if current free-money mortgage-interest rates should start going up, sales and prices are sure to suffer. Short version: We’re still playing real-estate roulette.

Negative equity has some other less obvious economic consequences, too, such as inhibiting labor mobility. If you are anchored in California because you cannot afford to take a $30,000 hit selling your house, it is more difficult to take that job in Texas.

The Obama administration’s response to the housing meltdown is widely held to have been a comprehensive failure (when you’ve lost Businessweek . . .), but then there was no ingenious idea from Washington that was ever going to have changed the fundamental problem: Lots of people bought houses they couldn’t afford, and lots of people irresponsibly lent them money to do so, in part as the result of a wildly popular bipartisan consensus that government should encourage people to buy houses. Remember that the next time some guy seeking elected office tells you he is going to fix the economy by legislating away economic facts.  

Tags: Fiscal Armageddon , Housing

A Non-Deal on Foreclosures


In Lyndon Johnson and the American Dream, Doris Kearns Goodwin (just Doris Kearns in NR’s copy of the book — we’re old-school) has one interesting observation about LBJ: He never got out of the legislative mind-set, and his measure of success when crafting his hallmark programs, from Medicare to the Civil Rights Act of 1964, was simply getting the bill passed. Never mind the contents of the program: Just get something signed into law. Tragically for LBJ, he didn’t have a Nancy Pelosi around to tell us that we had to pass Medicare so we could find out what’s in it.

I get the same feeling for President Obama’s new mortgage settlement: Never mind what it does, or whether it does any good, just get everybody’s signature on the deal.

Here’s what it does not do: It isn’t going to prevent a lot of foreclosures (and may in fact cause some), it isn’t going to assuage the terror in the mortgage markets, and it probably isn’t going to clean up the system that caused some number of homeowners to be foreclosed on without proper documentation.

Like the fiasco that was HAMP, this settlement will encourage homeowners to become delinquent on their loans: There’s $10 billion set aside for principal writedowns for delinquent homeowners, but paid-up borrowers only get $3 billion to encourage the refinancing of underwater mortgages. U.S. homeowners are upside-down to the tune of more than $750 billion, with more than a fifth of homeowners underwater. So, even if you think that the federal government ought to be in the business of trying to micromanage mortgage refis, this is four-tenths of 1 percent, assuming maximum utilization.

Also, those writedowns are going to cover (probably exclusively) mortgages that have been securitized. Guess who owns those? Fannie and Freddie have a pot of them, as well as pension funds, particularly large, government pension funds. So the banks are going to be taking a writedown: The taxpayers are going to be taking a writedown. (Though the markets probably have already discounted those securities by this point, so that point may be moot.)

And one of the biggest problems — the mortgage documentation system — goes largely unaddressed. Basically, the new rules say to fast-and-loose mortgage servicers: “Don’t do that again, and pay $1,500 to $2,000 to everybody you foreclosed on without proper documentation.” Given the complexity of assembling proper documentation and the legal costs involved, $2,000 per offense is a great bargain for the wrongdoers, practically an invitation to keep doing exactly the same thing. Everybody gets worked up about robo-signing, but robo-signing is not the root of the problem, only a symptom of it: The root of the problem is that the underlying system for keeping track of mortgage ownership in an age of securitization and mass default is entirely inadequate to the task. So far as I can tell, the new servicer rules basically say, “Document stuff the right way next time,” but don’t do much to spell out what that looks like and creates incentives not to comply. If the price of fraud is lower than the benefit to be derived from the fraud, then what is the disincentive to fraud?

None of this will stop President Obama from doing a little preening and bragging that he got the banks to cut homeowners a break, even though this deal costs the banks basically nothing and does basically nothing for homeowners.

I am not super-enthusiastic about most kinds of financial regulation, but the basic rule of law requires that you be able to legally document your right to foreclose on a house before you foreclose on it, and the current system does not provide that easily. We’d have been better off taking $27 billion to Google and asking them to design a proper document-management system.  

Tags: Housing

Bailing Out the Bail-Outers



Next up on the bailout parade? The FHA, probably:

The Federal Housing Administration, which backs about a third of U.S. home loans, could require billions of dollars in taxpayer aid if the housing market continues to deteriorate, a Republican lawmaker said.

The agency, which provides liquidity by protecting lenders against borrower defaults, could follow in the footsteps of Fannie Mae and Freddie Mac, the mortgage companies that were taken into government conservatorship in 2008, Representative Jeb Hensarling said at a House hearing today.

“FHA is a disaster in the making and if we don’t do something it may become the next Fannie and Freddie,” said Hensarling, the fourth-ranking House Republican. “If the FHA was a private financial institution, likely someone would be fired or fined and the institution would find itself in receivership.”

As somebody once put it: FHA is the new sub-prime. And whatever’s below subprime, that’s where it’s headed. Why? Congress is authorizing the FHA to up the size of the mortgages it will back from  $625,500 to $729,750 (which many Republicans rightly opposed), and it’s doing the occasional near-billion-dollar deal, including building a hospital in Trenton, N.J. (Yes, you’re right, FHA stands for Federal Housing Administration, not Federal Hospital Administration. No, I couldn’t begin to guess how they justify that.)

So, a growing portfolio, increasing its risk exposure, expanding its operations: FHA must be flush with cashola, right? As it turns out . . .

Last month, an independent actuarial analysis concluded that the net worth of the fund stood a 50 percent chance of falling to zero or near zero, which could force it to seek taxpayer support for the first time.


The Obama administration is going to spend the next week trying to convince you that today’s employment numbers are good news rather than bad news. But keep the housing market in mind when the president tells you the sun is shining on the job market: What coordinates highly with mortgage defaults isn’t being upside-down or seeing a large drop in your home value — what coordinates highly is being unemployed. Housing continues to tank, and it is tanking hardest in those cities that had the worst reversals in the job market. Reports the Financial Times:

The worst house price falls were in those areas scarred the most by high unemployment and foreclosures. Three cities posted new lows since the first reading of the index in 2006 – Las Vegas, Atlanta and Phoenix.

“It is a bit disturbing that we saw three cities post new crisis lows. For the prior three or four months, only Las Vegas was weakening each month,” said Mr Blitzer. “Now Atlanta and Phoenix have fallen to new lows too.”

Hey, Barack Obama voters in Atlanta, Phoenix, and Las Vegas: Are you better off than you were four years ago? I think not.

But conservatives should remember to ask the follow-up question: Hey, constituents of Harry Reid, John McCain, and Saxby Chambliss: Are you better off than you were four years ago? Conservatives are focused, with good reason, on Barack Obama, but it’s Congress that writes the budgets, Congress that writes the regulations, and Congress that is going to have to take the lead in getting the economy back where it needs to be. And it’s Congress that just upped the FHA loan limits, which are now higher than Fannie Mae’s and Freddie Mac’s — something John Boehner never should have let see the light of day.

A republic, guys — not a bank, not an insurance company, not a hedge fund: a republic. If we can keep it.

Tags: Debt , Deficits , Fiscal Armageddon , Housing



Salon has an article today predicting the future of an economic commodity. I have a recollection that they are not always very good at predicting such trends. What was that earlier article headlined? Ah, yes: You Really Should Buy a House. I Mean It. Highlight: Foreclosure is no big deal for the banks!

Tags: General Shenanigans , Housing , Predictions

Only Suckers Pay Their Mortgages ...


… with their own money, anyway. Uncle is now handing out $50,000 checks to homeowners threatening to default on their mortgages.

The Treasury Department says it will send $2 billion to 17 states that have unemployment rates higher than the national average for a year. They will use the money for programs to aid unemployed homeowners. Some of those states have already designed such programs.

Another $1 billion will go to a new program being run by the Department of Housing and Urban Development. It will provide homeowners with emergency zero-interest rate loans of up to $50,000 for up to two years.

A check for fifty grand? That’s got to be the biggest welfare payment not made to a farmer that I ever have heard of.

Notice this is another TARP tumor: In spite of the new financial-reform bill’s promise to roll up TARP, we’re still using “saved” TARP funds for spending shenanigans of every stripe.

Tags: Fiscal Armageddon , Housing

Subprime Nation: The High Price of Cheap Money


It’s a great time to buy a house: Mortgages are at record lows — 4.4 percent for a 30-year loan.

It’s a terrible time to buy a house: Real-estate is still overpriced and likely to decline at least 5 percent — or as much as 20 percent if the double dip we’re apparently heading into turns out to be a deep one.

So the question is: How cheap does the money have to be before you decide to pay too much for the asset? That dilemma is the U.S. economy in miniature. Government borrows tons of money to get monkeys high on cocaine and other (economically, un)stimulating projects, but it gets to print all the money it wants and thus to repay the debt in devalued dollars. When the dot-com bubble turned out to be built more on gee-whiz tech enthusiasm than on real profits, we flooded the system with cheap money in the hopes that suckers investors thus armed would be up the price of those devalued assets. They bid up the price of real estate instead — and when that cheap-money bubble went south, what did we do? What are we doing? Flooding the economy with cheap money in the hopes that we can reinflate the real-estate bubble and start the whole thing all over again.

Now, with interest rates at basically zero and the economy probably headed back into recession, what is the Fed going to do? It can’t very well cut interest rates. Instead, it’s buying up Treasury debt. The Fed acquired a bunch of mortgage-backed securities as part of the bailouts. The Fed had planned to return that money to the taxpayers and let those assets disappear from its balance sheet as they were paid off. (Note: Never trust the government to do what it says it is going to do with the money it takes from you.) Instead, the Fed is taking that mortgage-bond money and investing in Treasury bonds — a subprime-for-subprime swap. The government is, in effect, buying its own debt. The Fed has a $2.3 trillion portfolio, and about $200 billion of those mortgage-backed securities will mature each year — more than the budget of the United States Army (2010 budget: $142 billion).

The problem for the economy at large is precisely the same as the problem for the housing market: the underlying assets have lost a lot of value, and you can’t make money cheap enough that paying too much for them makes sense. With our public debt headed toward Greek levels thanks to Obama & Co., and a deeply damaged financial system, we are due for a deep and intense national restructuring. There’s no way around that, and all of the cheap money that Helicopter Ben wants to throw at the problem won’t make it go away.

Tags: Fiscal Armageddon , Housing

Can-Kicking toward the Double Dip


The Federal Reserve made no move to tighten up the loosey-goosey money supply today, keeping the rate at 0.0-0.25 percent. Fed-watchers don’t expect any tightening until the second half of 2011. That’s a lot of cheap money for a long, long time.

But the Fed may have its eye on some other rough news today: Housing is nearly back in meltdown mode. New home sales dropped nearly 33 percent in the new report, down to an annualized rate of 300,000 – the lowest number on record since Commerce starting tracking the figure in the early 1960s. Housing is headed for a double dip; is the rest of the economy?

Uncle Sam has done everything in his power to keep the housing market mobile, from endless support for Fannie and Freddie to that silly $8,000 first-time buyers’ tax credit, which only served to front-load some marginal sales, producing a spike in sales that only makes the fall-off look that much more steep. Housing still has a good long ways to fall before prices get back to their historic trendline. Sir John Templeton, predicting the housing crash back in 2000, offered this advice: “After home prices go down to one-tenth of the highest price homeowners paid, then buy.”

Problem is, Uncle Sam already bought, and the Fed has a lot of mortgage-backed stuff on the balance sheet. Investors have always wondered which way the government will go, but now the government is an investor, and a big one. We’d probably be better off if Washington would just let housing hit bottom, but you can be sure that the Obama administration will go red in tooth and claw fighting to keep whatever’s left of the real-estate bubble inflated, borrowing our way out of stagnation. Where have I heard that idea before?

Tags: Housing , Monetary Policy

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