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How to make sure housing doesn’t bring down the economy again

How to make sure housing doesn’t bring down the economy again
Creative Commons/Ed Kohler
The commission's fix: retarget all new subsidies to the most vulnerable families, those earning 30 percent or less of the area median income.

On Monday morning, the Bipartisan Policy Center issued its recommendations to overhaul the nation's housing finance system.

No, the presses did not stop for the news, but this is one think-tank to which we should pay some attention. Founded in 2007, by four former Senate majority leaders, Howard Baker, Tom Daschle, Bob Dole and George Mitchell, it gathers opinion and analysis from both sides of the aisle as well as from leaders of commerce, industry and the nonprofit sector to figure out solutions to our knottiest problems.

And so it was with housing. Leading the effort, which took 16 months, were former heads of the U.S. Department of Housing and Urban Development, Henry Cisneros (Clinton), Mel Martinez (Bush II) and two former senators, Kit Bond (R-Mo.) and George Mitchell (D- Maine). They were aided and abetted by folks from the National Council of Homebuilders, the National Council of La Raza, local housing authorities, the Consumer Federation of America, the Coalition to End Homelessness -- well, the list runs on and on. It is a consensus of notables on what should be done about a system that brought down the economy, sent families into financial ruin and devastated neighborhoods across the country. If you want to know what might be done about it all, this is the document to study.

Not surprisingly with a bipartisan effort, the proposals embodied no bold departure from the past. The group still endorses homeownership over renting, the mortgage interest deduction and the securitization of mortgages. And, in the spirit of our straitened times, it put a premium on spending as little as possible and cutting back on government involvement.

Help for the poorest

The one exception was the group's approach to affordable, that is, low-income housing. As MinnPost noted last year, an increasing percentage of renters here and across the country, about 50 percent, pay way beyond 30 percent of their incomes for housing. (That's the federal standard for affordability.) The federal government provides rental subsidies for those whose incomes fall below 80 percent of an area's median income. If a family's rent is 50 percent of income, the federal government will provide 20 percent to keep the household's rent affordable. However, only a quarter of the families qualifying for federal subsidies actually receive them. Others sit on waiting lists for years or win a place in the program through a lottery.

The commission's fix: retarget all new subsidies to the most vulnerable families, those earning 30 percent or less of the area median income. (Ramsey County's median income, FYI, is about $51,000.)  

Such payment subsidies would allow families to choose housing on their own, possibly moving to safer neighborhoods where schools are better. However, the program would not mitigate the need for new affordable housing, especially for the burgeoning ranks of elderly who won't be able to stay in their homes.

To create more of it, the commission proposes expanding the dollars allocated to the low-income housing tax credit program by 50 percent. To pay for that, about $3 billion, and the housing vouchers, another $22.5 billion, the commission recommends limiting the extremely popular, don't-pry-it-from-my-cold-dead-hands home-mortgage interest deduction (which costs the government $68 billion a year). How would that happen? The commission was silent on the amount and the method, though presumably the government could cap the amount of deductible interest at some nosebleed level that would apply only to the owners of multiple mega-mansions.

To Chip Halbach, executive director of the Minnesota Housing Partnership, whose mission is to assist communities in the creation and preservation of affordable housing, "providing every one of those households with a voucher guaranteeing them housing would be amazing" — tantamount to creating a right to decent housing for the poorest among us.

"Those households will still be in tough shape, but at least they'll have a roof over their heads," he adds. In fact, people who earn from 30 percent to 80 percent of area median income aren't in such great shape either, but the commission recommends only that they be given short-term housing assistance in emergency situations, for example, a job loss or a medical crisis. Otherwise, they're on their own.

Few ideas for the credit crunch

As things stand now, the government supports 90 percent of single-family mortgages. Via quasi-public entities such as Fannie Mae and Freddie Mac, it purchases home loans from lenders that originate them, package them as securities and then resell them to investors. Doing that frees lenders' capital to make more loans. There is no explicit guarantee that if homeowners failed to make payments, the government would step in. But when the housing market went south six years ago, it did and both Fannie and Freddie's fell into insolvency. 

Having taxpayers on the hook is "unsustainable," says the report. "Reducing the government footprint and encouraging greater participation by risk-bearing private capital will protect taxpayers while providing for a greater diversity of funding sources." That's a roundabout way of saying that banks and other lenders, mortgage insurers and private mortgage securitizers should get back in the market.  

Private capital's inability -- and more recently, unwillingness -- to participate is supposedly what is making mortgages hard to come by. But what would lure them back in? When queried about this, Henry Cisneros went vague. "It's our belief that they will," he said.

"Credit is tighter than it needs to be," admits Barry Zigas, director of housing policy at the Consumer Federation of America and a member of the commission. Part of the problem is a reaction to the collapse of the housing bubble. Lenders are overcompensating for their previously lax lending policies. Only the passage of time will make that reluctance to lend disappear.

Uncertainty has been another factor. Private companies did not want to securitize mortgages because federal law now requires the loans to be sustainable -- meaning that banks must only issue mortgages that borrowers have a prayer of repaying. You'd think such a premise would go without saying, but, adds Zigas, "Lenders said there was a lack of clarity." That has changed. As the commission's report was finalized, the Consumer Financial Protection Bureau promulgated lending regulations. Banks may not like the rules, but they are now clear.

Finally, the commission would make the market safer for investors by creating a so-called Public Guarantor to replace Fannie and Freddie. Its funds would be made up of collections from the lending industry, and it would repay investors if any homeowners, lenders, insurers and everybody else involved failed to cough up their payments.

Yesterday’s problems

Whether the commission's recommendations would actually change much is open to question. Keith Gumbinger, vice president of HSH, the largest publisher of mortgage information, says that many of the problems the think-tank is trying to fix are now behind us.

Getting a mortgage, for example, is no longer impossible. "The days are gone when you could breathe on an application and get it approved," he says. "But the vast majority of humans with decent credit can qualify."

As for Fannie and Freddie, they are returning to solvency. In the last quarter of 2012, Fannie Mae brought in a net income of $1.8 billion. Gumbinger didn't see a need to scrap the agencies. In fact, he adds, "They were what kept the housing market going for the last five years." 

"It seems as though the commission is trying to solve yesterday's problems," he adds. "They should be looking at future problems, but, of course, nobody knows what those will be."

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Comments (8)

Reasonable--kind of

The problem with high housing costs is that they're encouraged by the ability to pay. That is, if housing prices are too high to afford, yet somehow people afford them anyway, what is the incentive to bring the prices down? The problem with this solution is that it might put those who can least afford it into the position of suffering while the market "corrects." Housing isn't a luxury, it's a necessity, so market value depends only on the number of people who need it. If buying a home becomes too costly, rental prices rise because people are pushed toward renting. When rental becomes more costly than buying, then home prices rise to meet the demand. So, there are really two choices--well, three if you count going homeless--renting or buying. And since buying has the barrier of a down payment, and there is limited down payment assistance and no more mortgages that allow no down payment any more, rent will continue to rise without a price check. The barrier to owning will get steeper later this year, as well, with FHA mortgage insurance rates going up.

Make no mistake, there needs to be more affordable housing. The question is how to solve the problem. I think there definitely needs to be some retraction of subsidizing in order to reduce demand for high rent/housing costs. However, you can't simply move families who can't afford the housing they're already in on their own to the streets while prices come down.

The answer is going to have to be to build additional housing. While living in your own (owned!) home should be a goal, that goal doesn't necessarily have to compete with multi-family housing. Part of affordable housing is the ability to get to/from jobs and every day needs affordably. Most of the housing complexes that provide this are high end/high cost housing. Condos near down town (Minneapolis, St. Paul, or any of the 'burbs for that matter) with a grocery store and other retail at the base and nearby public transportation are expensive. Yet, these are exactly the housing solutions we need for those with limited incomes. Would it be more cost effective for the government to build similar housing and provide the proper price point rather than continue to subsidize overpriced private housing? Could it be more affordable for the taxpayers to invest in these kinds of buildings and proper management than throwing 20% toward families who pay 50% of their income on housing? Is it possible, with the benefit of tax-free building materials and no property tax, government-built buildings can provide proper housing at the right price and also pay for itself?

I do cringe at the thought of "government housing." But $25+ billion a year is a lot of money just to keep people in any kind of home. And it doesn't even appear to cover everyone who actually needs it.

Historic 30 year fixed

Historic 30 year fixed mortgage rates were always well above 5 % until mid-2010. Now they are at an unprecedented 3%

http://www.hsh.com/mtghst/mortgage-rates-by-product/30-Year-FRM

What are the effects of this?

The first and most obvious effect is that houses are more affordable with lower payments.

The second is the falling interest rates have been very good for the bond markets.

But what does it mean in the wider economy?

People who depended on interest rate income are getting hammered.

More people have been pushed into riskier investments in order to beat inflation.

But perhaps even more importantly for the economy as a whole, by what mechanism can interest rates ever return to historic norms without massive dislocation? Are we making an economy where we can no longer have normal rates?

Who would or could re-finance up in rates?

What would happen to housing affordability?

The bond market in the existing low-rate mortgages would be hammered.

And a private bank issuing and carrying a quantity of mortgages at 3% for 30 years in a rising interest rate environment WILL have a financial disaster.

And that is why the fed is basically the only player at these rates.

Another fine trap we have laid for ourselves.

The Housing Problem That No One is Talking About

Our recently built housing stock and many of the recently remodeled older homes have such poor workmanship and materials that they will not out last the mortgages that are attached to them. There was a wholesale change in the construction industry in the 1990's and we haven't begun to pay for it. I believe that most of the outer tier burbs will be bulldozed before they ever become 2nd or 3d generation housing.

Just wait until those of us

Just wait until those of us who are >30-percent underwater on our mortgages but can still afford the monthly payments have to move. It's bad enough we can't refinance and are stuck at 6-percent interest. When we have to figure out how to make up the difference between what our house will sell for and what we owe the bank, it won't be pretty.

Distorting the Market

I've talked about this a bit elsewhere on the web, but I've gotten really skeptical about the whole premise of subsidizing housing, whether it's the mortgage interest deduction, or "affordable" new construction where we explicitly pay a developer to build a building, rent the units for $1200, and then have the government pay half the rent. It just seems very convoluted.

In theory, there's a natural progression in the market. Older units are more affordable. There's a whole article in the Strib today about Uptown hipsters complaining that "housing is already too expensive" and so they shouldn't build new units. New units are expensive. New units make older units less expensive. Unless, of course, we do two things. First, we all make an assumption that the poor aren't able to take care of themselves (which, as a society, we have done) and shower them with all kinds of subsidies that prevent them from really understanding how the regular economy works. Second, we go to neighborhood meetings and whine about how building a four story building on a surface parking lot will be the last straw that turns Minneapolis into Manhattan, once and for all. Both of these things work together to artificially distort the market and prevent it from providing low cost units by itself.

This is a complicated series of issues, and I'm definitely not 100 percent sure that I'm correct. But the policy of the past fifty years where we have the government give money to the poor because we're allowing corporations to pay them 7.50 an hour to work thirty hours a week with no benefits...that hasn't really worked for anyone. Other than the corporations, of course.

Good points

Enforcing a living wage would make a whole lot of things affordable.

good point

The focus on affordable housing is admirable, but this has little to do with the real estate, finance, and credit dynamics that crashed the global economy. I hear very little conversation about actually fixing those much larger systemic forces, things such as Wall Street regulation, Federal real estate subsidies, the global credit markets that demand and require "safe" investments with high rates of return. (An impossible proposition.)

It seems like most everyone in power just wants real estate prices to keep going up forever again, and for the 80s - 2000s development patterns to return. That's what'll crash the economy again, not a voucher program.

Thanks again

…to Ms. Kahler.

Having served as both a planning commissioner and an affordable housing commissioner, I have to say that two of her sentences get at the heart of far too much public/housing policy: “Condos near down town (Minneapolis, St. Paul, or any of the 'burbs for that matter) with a grocery store and other retail at the base and nearby public transportation are expensive. Yet, these are exactly the housing solutions we need for those with limited incomes.”

Public transit is something necessary for that lower 30% in terms of income. It’s an amenity and convenience — for another generation or so — for those affluent enough to have a choice because their incomes are safely above that 30% threshold. In a generation, gasoline will be expensive enough that the auto-dependent suburban model of the past 70 years will implode. At that point, LOTS of people will be demanding public transit.

At the moment, however, it’s practically criminal to build transit, disrupt neighborhoods filled with people below median income (often forcing them out of existing, affordable housing in the process), and then, through zoning and housing policy, make the housing around the newly-built transit system so expensive that only those of median income and above can afford to live near enough to that public transit to actually use it. In effect, the whole society, especially that part at the lower economic end, pays to provide an amenity and convenience for those at and above median income. Ethically, it’s indefensible – the transit and housing equivalent of providing a lower tax rate for capital gains.

Meanwhile, Steven Bailey has a very relevant and disturbing (and, as he suggests, unspoken) point. Waferboard is NOT a long-term building material, and actual lumber is increasingly UNaffordable. Old housing may turn out to be not only the “greenest” in the environmental sense, but eventually, and ironically, the most affordable if “single-family, detached” is what still drives the housing market in decades hence.