Tuesday, July 31, 2012

FHFA rejects principal reduction but ignores shared appreciation

by Ethan Handelman, National Housing Conference

Ed DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA), announced today that he would not direct Fannie Mae and Freddie Mac to allow principal reduction. The announcement comes despite earlier analysis suggesting that Fannie Mae and Freddie Mac could save significantly using principal reduction and it ignores options such as shared appreciation that could align borrowers’ and lenders’ incentives effectively. The result will be fewer underwater borrowers seeing relief from too-high debt and foreclosures we could have avoided.

FHFA’s decision was based on its analysis of what would happen if Fannie Mae and Freddie Mac offered a principal reduction option to borrowers in distress—a public, systematic, and untargeted approach to principal reduction. The conclusion, unsurprisingly, was that if even a small fraction of current borrowers chose to strategically default in order to qualify for principal reduction, the result would cost more than doing no reduction at all.

Quite simply, FHFA got the wrong answer because it asked the wrong question. Had it analyzed a targeted principal reduction option that required participants to make a substantial concession in order to participate, the results would likely have been very different. Shared appreciation modifications, for instance, offer underwater borrowers forgiveness of principal in exchange for a share of possible future appreciation. A truly distressed borrower would make that trade—most strategic defaulters wouldn’t.

Shared appreciation is one good way to target principal reductions, but there are others. By ignoring targeting options and looking only at sweeping implementation of principal reduction, FHFA has removed useful tools from the toolbox. It will be that much harder to fix the foreclosure and underwater mortgage problems as a result.

For more, see:

Pushing the presidential candidates on housing

by Ethan Handelman, National Housing Conference

Housing has been far from central to the presidential campaign, despite its critical role in economic recovery and household stability. With nearly one in four working households spending more than half of their income on housing (see Housing Landscape 2012) and the risk or reality of foreclosure dragging on communities nationwide, you’d expect to hear more from the campaigns on their plans for reviving housing markets, creating housing options, and stabilizing neighborhoods. Monday’s editorial from the editors of Bloomberg pushes the candidates to do exactly that, starting with principal reduction for underwater borrowers in a shared appreciation approach that gives both borrower and lender hope for future value while sharing the cost of debt reduction. It’s worth a read, both for the policy recommendations and for its clear summary of the little we’ve seen so far on housing from each candidate.

Monday, July 30, 2012

An Introduction from NHC President and CEO Chris Estes

by Chris Estes, National Housing Conference

This is my first of what I am hoping will be many regular messages you will be getting from me as a member of the National Housing Conference. I am happy to report that I have settled into D.C. and completed my first week at NHC successfully. Like any transition, it is a bit of a whirlwind, especially when you are relocating to somewhere new.

After nine years as the director at the North Carolina Housing Coalition, I chose to make this move because of both the tremendous need for a strong advocacy and resource organization in Washington that could reach the entire spectrum of the affordable housing community and because of NHC’s unique position to be able to fill that role. You should know that I am a passionate advocate for affordable housing and am fully committed to working with our great staff on being the best resource for you as possible as well as having the biggest impact possible on housing policymaking. My ultimate goal is that the National Housing Conference is an organization that everyone working in affordable housing in every capacity will find value in and will want to be a part of.

I have been very busy working with our staff to fully understand all of NHC’s work, communications and products. This will continue for the next few weeks as I meet with board members, funders and key stakeholders about how to increase NHC’s impact on affordable housing policy both in Washington and across the country. As part of this work we will be re-examining all of our publications and correspondence as well as our other media like our website and blog to make sure we are providing comprehensive content about housing as well as what NHC and our research affiliate the Center for Housing Policy are doing to improve housing policymaking.

Most importantly, I am excited to connect with our members both through regular writing in the Washington Wire and in getting out to communities across the country as much as possible to learn from and add to the work on affordable housing efforts at the local level. You will start to see some changes soon as we work to improve the look and feel of the Washington Wire and our website over the coming months. My goal is to have a regular presence in the Wire so members can stay connected to all the work we are doing here in D.C. as well as across the country. One of the first changes you will see is an experiment to move the Wire to Tuesday morning distribution to see if folks find that more convenient.

I am eager to hear from you about what you want from NHC, what you think of any changes we make to our communications and how we can be a part of your work at the state and local level.

Thanks for your support,


Friday, July 27, 2012

Moving beyond unit-counting: Comments on the GSE housing goals

by Ethan Handelman, National Housing Conference

The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, recently requested public comments on the affordable housing goals. NHC provided comments developed through our Housing Mortgage Working Group. While it is important for FHFA to renew and enforce the existing laws to encourage the GSEs to finance affordable housing, it is even more important to focus on how to make affordable housing a central part of the next iteration of mortgage finance. We need to move beyond simple numerical housing goals and toward an economically sustainable, ongoing business commitment to reach the underserved.

It is clear that access to affordable housing must inform the entire system, not just the goals of some providers. A well-regulated system of housing finance creates business opportunities for private participants, including those without government backing. All participants in that market, therefore, should have some obligation to serve those left out. Participants who receive larger benefits, such as explicit government backing, should bear a greater obligation to pilot new approaches, design new products and otherwise demonstrate economically sustainable ways to address underserved market segments. The obligation to make sure that the benefits of an efficient secondary market extend broadly to all in America goes beyond a simple unit-counting goals approach to one that encourages an economically sustainable, ongoing business commitment to reach the underserved.

You can read the full comment letter, which also recommended:
  • Implement the goals and Duty to Serve, while remaining open to adjustment. Specifically for multifamily, raising the goals per the proposed rule is appropriate.
  • Encourage the GSEs to facilitate preservation of existing affordable housing. The evaluation of the statutory Duty to Serve should encourage GSEs to facilitate recapitalization of existing properties with their portfolio of Housing Credit investments.
  • Allow no credit for multifamily conversion loans goals for any transaction where the underwriting assumes the conversion from goals-qualified to non-goals-qualified units, such as through elimination of state or federal affordability restrictions on rents.

Thursday, July 26, 2012

Sen. Merkley offers new mortgage refinance proposal

by Ethan Handelman, National Housing Conference

The market simply has not refinanced all the loans that need refinancing (see our related discussion of why mortgages are so hard to get). Interest rates have fallen to record lows, but many homeowners remain trapped in underwater loans at higher than market interest rates. In a normal real estate market, those borrowers would refinance, but because values have dropped so severely in many markets, they can’t, leaving them with higher housing cost and more vulnerable to foreclosure. Despite policy changes through the HARP program and the efforts of FHA, refinancings have not reached many borrowers.

Senator Jeff Merkley of Oregon introduced yesterday a new proposal to address this problem directly, by creating a federal government trust to buy refinancing loans at 4% interest (for 15-year loans) or 5% (for 30-year loans). It would target current borrowers committed to staying in their homes for at least 4 years. Private lenders could originate the standardized loans and sell them to the trust, much like they do to other secondary market outlets. For a fuller summary, see the announcement.

The plan is bold step to cut through an apparent market failure. It addresses real housing need and deserves real attention to address questions it raises, including:
  • Will private lenders who originate mortgages to the new trust retain any risk or obligation post-origination?
  • How high of a jump in interest rates can the new trust survive without needing additional funds?
  • Are the proposed funding sources (bond financing, a fee on banks, and interest rate spread) viable, either economically or politically?
  • Once created, how long will it take to wind down the new trust?
These are just initial questions, and working through them is worth the effort if we can crack the refinancing challenge.

Wednesday, July 18, 2012

HUD accepting applications for distressed home loan sales

by Sarah Jawaid, National Housing Conference

HUD announced it is accepting applications for the Distressed Asset Stabilization Program today to bid on a new pool of distressed single-family loans. This program is “an expansion of an FHA disposition program that sells pools of defaulted mortgages headed for foreclosure and provides the opportunity for the purchaser and borrower to avoid a costly foreclosure” according to HUD's press release. Newark, Phoenix, Tampa and Chicago are the metropolitan areas where approximately 3,500 loans will be sold. Read more on HUD’s website.

HUD Secretary Shaun Donovan said, “The housing market has momentum not seen since before the crisis. But some metro areas are still under pressure and some FHA borrowers remain seriously behind on their loans and stand to lose their homes in a matter of months. As one step towards avoiding unnecessary foreclosures and further stabilizing communities, we are increasing the number of loans beyond our original goals of 5,000 per quarter to approximately 9,000 this quarter. Providing the opportunity for borrowers to potentially stay in their home under a new sustainable mortgage or other meaningful help not only benefits that homeowner but reduces the costs to FHA and ultimately benefits the entire community.”

Noteworthy in these distressed loan sales are neighborhood stabilization provisions limit buyers to those with proven experience in working out troubled home loans, managing distressed assets, and working to stabilize delinquent borrowers.

Do urban failings create suburban flight?

by Laura Williams, Center for Housing Policy

A few days ago, chatting with a friend who I consider to be similarly urban-minded, I was caught off guard when she said something along the lines of, “Well, when we move out to the suburbs in a few years….” She and her husband, of course, want more space and fewer neighbors, and in many ways are driven by the “tradition” of leaving the urban core when children come along for better schools. I was surprised that such a mindset existed in our generation, cocooned as I have been for the last several years in a world of high-rises and research related to the changing demand for dense, walkable neighborhoods. The desire for good schools, privacy and personal space is something we in housing should not forget.

But in much the opposite way, the conversation brought to mind a report I saw recently about building family-sized units in downtown Toronto—and the deputy mayor’s reaction against the project. This kind of attitude—that families don’t belong in cities—becomes a self-fulfilling prophecy, as of course families will not want to raise children downtown if there are no green spaces, no (or poor) schools and no apartments that can accommodate more than two people comfortably.

Like all things, we need balance. Perhaps in additional to mixed-use and mixed-income, we should be talking about mixed-size households in our neighborhoods.

Friday, July 13, 2012

What a bottom in housing means for affordability

by Ethan Handelman, National Housing Conference

This week saw the Wall Street Journal declare that “housing is bottoming…the numbers are convincing.” The New York Times described a predicted improvement in the overall economy, based in part on housing forecasts, as “a firming up, if not quite a comeback.” Both were citing expert analysis and their own observations of aggregate national indicators like indexes of housing prices, totals of the existing inventory of homes for sale, construction starts, and recent transactions.

A bottoming out of housing markets and the concomitant return to rising prices, easier buying and selling of homes, and more construction would certainly be a good thing. There are a few caveats to keep in mind when reading such predictions:
  • Predictions of market bottoms can be self-fulfilling, so some have an interest in making them regardless of the data. Markets bottom out when we collectively agree that they have—expectations that prices will rise cause people to buy. So, those who want the market to improve will look assiduously for signs of improvement to highlight. Of course, that also means we’re more likely to dismiss such predictions. 
  • There is no national housing market. Real estate is inherently local. For most people, a home in New York City doesn’t trade against a home in Missouri, and prices reflect that. So national-level statistics have limited meaning. Some markets like the Twin Cities may have already found bottom. Others, like Atlanta or Detroit, may have many more years of decline ahead of them. Nick Timiraos had an excellent piece to this effect in the Wall Street Journal last month.
If you’re concerned about housing affordability, however, the market bottom won’t cure all ills.

Up-trending markets will see more construction and likely more robust home sales markets, as more sellers are willing to offer their homes and buyers are willing to invest. But they’ll also see rising rents and home prices, quite likely rising faster than incomes.. (The Center for Housing Policy released an update to their Paycheck to Paycheck database yesterday, addressing the growing issue of the gap between wages and housing costs.) So the affordability problems, from working families down to the poorest of the poor, will get worse. That’s especially true in places where local zoning and land use policy make it harder to create new housing when demand rises or that don’t preserve affordability along with new development.

Down-trending markets will remain in the vicious cycle of foreclosure, lack of demand, neighborhood disinvestment, and asset deterioration. Unless smart public interventions interrupt that cycle, it will be hard for the market to recover on its own. If incomes remain low because of limited economic activity in the area, depressed asset prices aren’t enough to make housing affordable (see the Center for Housing Policy’s discussion of the relative movements of housing costs and incomes in Housing Landscape 2012).

Even as we keep eyes peeled for a bottom in individual markets, we have to keep working on policies that help make housing affordable for the nearly 24% of working households paying more than half of their income toward housing. We need to stabilize neighborhoods in the face of widespread foreclosure, preserve and create affordable rental housing, ensure broad access to safe, affordable mortgages, and making inclusion of affordable a core part of local land use.

Thursday, July 12, 2012

Housing affordability remains a problem

by Laura Williams, Center for Housing Policy

Today we released a new edition of our Paycheck to Paycheck database, analyzing how many of 74 occupations can afford to own and rent homes in over 200 metro areas. Despite low interest rates and, in most communities, lower home prices, many jobs in metro areas across the country do not pay enough for a family to afford shelter.

In many ways, I feel like that’s enough of a story. Unemployment remains a huge problem in this country, but many people with jobs still can’t afford a place to live. Full stop.

But there is more to tell, of course. Even when homeownership is affordable on paper, many families can’t buy because they can’t secure a loan, are wary of locking themselves down in a poor job market or don’t have the savings for a down payment. Renters, on the other hand, are facing higher prices in many markets; every family that doesn’t buy is likely renting (we hope not homeless) and supply has not been able to keep up in most places. Nor have paychecks.

In this edition of the database we’ve pulled out five jobs that are being targeted by veterans’ job training programs. These programs work with returning veterans, providing training and support as they transition to civilian life. The five we’ve identified—carpenter, dental assistant, electrician, firefighter, long-haul truck driver—are fairly typical, according to the Bureau of Labor Statistics, and they are generally at the higher-earning end of the jobs we look at for Paycheck. But for many, these jobs won’t pay enough to afford a home. For young people who have voluntarily left the job market to serve their country, this seems particularly egregious. We are hoping Paycheck to Paycheck is the beginning of a conversation about how we all can work together to provide more affordable housing—to veterans, and to all Americans.

Wednesday, July 11, 2012

New York City pursues micro-housing

by Blake Warenik, National Housing Conference and Center for Housing Policy

Last week, Jeffrey Lubell here at the Center wrote his monthly Moving Forward column on "perennial grains"—ideas that could be used to make safe, decent, affordable housing sustainable and self-renewing. One tactic he mentioned is for developers and builders to begin focusing on smaller homes using the latest research and design principles to make small spaces feel and function like larger ones.

Example "micro-unit" floorplan. Office of the Mayor, New York City
In a resounding confirmation of the value of this idea, at least one city will be experimenting with homes that put premium on design over square footage. The New York Times' City Room blog reported this week that New York City Mayor Michael R. Bloomberg has announced a city-sponsored competition rewarding the best designs of apartment buildings full of "micro-units" with 275 to 300 square feet of living space. (Currently, zoning regulations require a minimum size of 450 square feet.) A sample design from the mayor's office includes a kitchen and a bathroom, but eliminates closets to save space.

"Young people from around the country or around the world—those are our future, and they don’t have a lot of money,” Bloomberg said at a news conference. "You have to change the rules along with the requirements."

New York's hyper-expensive housing market makes for an extreme example of such tiny homes. However, demand for this type of home in New York is not without precedent. The Times piece  continues to describe the popularity of single-room occupancy buildings and so-called "bachelor's apartments" during an influx of young labor in the 1920s and 1930s.

In other housing markets, "small" homes need not be so tiny to be less expensive than average homes.

Monday, July 9, 2012

California passes mortgage servicing and foreclosure mitigation legislation

by Sarah Jawaid, National Housing Conference

California legislators passed a set of bills (SB900 and AB278) July 2 that aim to stop abusive mortgage servicing practices and help homeowners avoid foreclosure. The bills, expected to be signed by Governor Jerry Brown soon, make dual tracking unlawful, a process used by servicers to expedite the foreclosure process even if families are in talks with the servicer to modify their mortgage. They also make “robo-signing,” or signing foreclosure documents without review, illegal. California is one of the hardest hit states in the country, and these bills are a state-level effort building on the national mortgage settlement earlier this year.

An opposing view comes from the California Mortgage Bankers Association in their “Call to Action”, where they warned that “in order to for the real estate market and our national economy to recover, it is vital that we support efforts to restore certainty to the mortgage market while avoiding an overreaction that causes harm down the road. Unfortunately, these bills work contrary to that goal, and would harm the California economy by sharply curtailing consumer choice and costing the state jobs.”

Read the full story from Reuters for more information.

Thursday, July 5, 2012

Moving Forward: Searching for Housing's "Perennial Grain"

by Jeffrey Lubell, Center for Housing Policy

Despite endless washing, my hands often betray my love of gardening (and dislike for gloves). My garden is not nearly as big as a farm, but it is big enough to require a sizable quantity of straw to make compost and cover the garden beds over the winter. In looking into whether and how to grow my own straw (the hollow stalks of grain crops), I came across information about "perennial grains"--a type of grain that you plant once but can harvest for many seasons thereafter. Perfect for producing lots of straw, not to mention grains for cooking and baking!

Here's the rub: right now, perennial grain crops are mostly a gleam in researchers' eyes. The grains we eat—wheat, oats, barley, etc.—are all annual crops, requiring time-consuming and energy-intensive plowing, planting, irrigation, and seed collection or purchase. Perennial grains would have many advantages, including deeper roots that require less irrigation and fertilizer; a longer growing season and improved productivity on marginal land; and elimination of the need for annual plowing, which contributes to the erosion and degradation of the soil.

All around the world, researchers are working to develop viable perennial grain crops through a wide range of strategies. It's a bit like the holy grail of sustainable agriculture.

This got me thinking about what the equivalent might be in the affordable housing world. Is there a "perennial grain" of affordable housing—a market-based solution that helps to significantly improve housing affordability? If so, what is it and how could we nurture its development and replication?

Before attempting to answer these questions, it is worth pausing to clarify the key characteristics of "perennial grains" that we might look for in a housing good, service or policy:
  • First and foremost, perennial grains are a market-based solution. Once an effective perennial grain is developed, its use will be motivated by the self-interest of farmers seeking a profitable outcome—in terms of food production and/or monetary profit—relative to other alternatives. 
  • At the same time, there is an important role for research funded by the government and philanthropy to develop more effective perennial grains that provide sufficient yield and taste to make them viable food crops. 
  • Third, it seems likely there will be a need for different kinds of perennial grains to meet the cultural and agricultural needs of different communities. There's no one-size-fits-all solution, but rather a need for a diverse set of options to supplement traditional agricultural strategies.
So is there a "perennial grain" equivalent for affordable housing? In general, I think there is. But as the discussion below suggests, the analogy will only take you so far. In many markets, there will be a need to marry market-based approaches with public policy solutions to maximize the benefits for consumers.

In my view, the most promising approach to a perennial grain for affordable housing would combine three strategies to significantly lower construction costs. None of these strategies is revolutionary, and all are already being employed to one degree or another. The key, as with perennial grains, is to figure out how to put the whole package together in a way that is sustainable and culturally acceptable. In addition—and here's where we may need to extend beyond the 'perennial grain' comparison—in many markets, steps will be needed to translate the lower housing production costs into greater affordability.

First the three market-based components:
  • Smaller Homes. It's not difficult to build a small home. But it is difficult to build a small home that feels like a larger one and meets the full range of human needs comfortably in a smaller space. Excellent design is arguably more important with smaller homes than larger ones, but it's not clear that most builders will generate the volume needed to justify the up-front design costs. Research could be used to develop and release into the public domain plans and ideas for single-family and multifamily homes that are small but well-designed. Research could also help developers understand whether (and where) there is a market for well-designed smaller homes that would be affordable to people not able to afford larger ones. (N.B. - helpful tips on the housing design of assisted properties may be found here.)
  • Lower-Cost Construction Techniques. There have been many advances in building technology in recent years. But due to challenges in the diffusion of technology, not all of these innovative practices are being widely used. Perhaps the most pressing research need is to develop effective channels for spotlighting the most promising approaches for reducing construction costs and encouraging their adoption. (The products of an earlier research partnership in this area--the Partnership for Advancing Technology in Housing (PATH)--may be found here. This PATH report is particularly on point, if a bit dated.) 
  • Increased Density. Where land costs are high, considerable savings in per-unit housing costs can be achieved by increasing the number of residential housing units to be constructed within a set parcel. Design is again essential here, as the attractiveness of the finished product will be critical to its acceptance. It seems to me that the larger obstacle is public acceptance of density, rather than lack of knowledge about how to produce it. Visualizing Density is an excellent tool for addressing this challenge.
So far, the perennial grains analogy holds up pretty well. But it breaks down in considering how to translate lower production costs into greater affordability. In a market in which there is ample supply and few barriers to entry, competition should keep profit margins in line and allow consumers to benefit from lower housing production costs. But in markets or neighborhoods in which supply is constrained—including many high-priced housing markets—producers may be able to continue to command the same sale prices or rents, notwithstanding lower production costs.

To ensure that lower production costs translate into affordability in supply-constrained markets, it will be important either to rely on (and empower) mission-driven producers who are willing to accept lower profit levels to deliver affordability or to adopt public policy solutions that create incentives or requirements for using these and other strategies to produce affordable homes. Examples include: density bonuses that condition greater density on the inclusion of a certain percentage of affordable homes, voluntary or mandatory inclusionary zoning, and expedited permitting rules for developments that include affordable homes. Policies that dramatically expand supply—such as rezoning formerly industrial areas into residential zones—can also help.

So is there a perennial grain strategy for affordable housing? I guess it depends on whether you choose to see the glass as half-full or half-empty. (Apologies for the mix of metaphors!) I'd say there is, since research-driven innovation and improvements in the dissemination of technology have important roles to play in lowering the costs of producing housing. At the same time, limitations on housing supply loom large, suggesting the importance of adopting public policies that help translate the lower production costs into greater affordability for consumers.

Monday, July 2, 2012

Small changes could help small properties in a big way

by Ethan Handelman, National Housing Conference

A proposal to encourage risk-shared financing of small multifamily apartment properties may get consideration in Congress. It’s worth a second look at how this idea could lead to real improvements in affordable housing, particularly since one third of renters live in small properties. (For background, see our previous summary of a HUD roundtable on the idea.)

The proposal in brief: Allow qualified lenders with a track record of small multifamily lending originate loans to refinance and renovate small properties, then share the risk on the loans with FHA and securitize with Ginnie Mae. Why it’s a good idea:
  • Small multifamily is underserved now. Properties of less than 50 units are owned, operated, and financed inefficiently. Most are owned by individuals or small business with small portfolios. Lending is idiosyncratic and dispersed, because the transaction cost of originating loans is large compared to the value to be gained. In short, we could be doing this business better. Reliable access to efficient capital will encourage more professionalization of ownership, management, and financing, leading to better quality properties.
  • Small properties are by nature affordable housing. These properties already serve one third of the nation’s renters—they are generally older properties with lower rents. Helping these properties raise capital for repairs preserves them as affordable housing (likely their highest and best use) without the need for legal affordability restrictions that could raise transaction costs.
  • Private capital would share the risk. Private lenders would take a large share (possibly 50%) of the risk in making these loans, helping to ensure that the government’s share of risk is protected. Government’s role is to connect these loans to the efficient Ginnie Mae securitization, which is a larger pool of lower-cost capital.
  • Mission-oriented lenders know this business. Nonprofit lenders like Mercy Loan Fund, Community Investment Corporation, Low Income Investment Fund, Community Investment Corporation of the Carolinas and others have been making these loans for years to good result. Helping them access more efficient capital channels could preserve many more affordable homes.
The proposal is a good complement to the bill to allow state housing finance agencies to risk-share and securitize with Ginnie Mae (see this blog post from the National Council of State Housing Agencies, an NHC member). Indeed, many state agencies are proven, effective lenders to small properties and could use both new options. Together, they are a low-cost way to create and preserve more affordable housing.