Rachel G. Bratt ProfessorUrban and Environmental Policy and PlanningThe U.S. Housing Crisis– 5 Years LaterCHAPASeptember 25, 2013
Outline I. Twelve (quick) observations about housing II. The housing crisis – causes, impacts and six comments about responses over past 5 years
1) It Matters Where People Live How they feel about themselves Safety, health, stability Access to good schools and jobs
3) Links to the Economy From The New York Times • “As Housing Goes, So Goes the Economy” -- May 24, 2011 • “Housing has blown a giant smoking hole in the middle of our economy, and the consequences continue to impede the pace of recovery.” -- February 24, 2012
4) Private For-profit Housing Market is Not Able to Meet Low-income Needs
5) Rhetoric in Support of Decent Housing Pres. Franklin D. Roosevelt 1944 “True individual freedom cannot exist without economic security and independence.” A Second Bill of Rights would provide “the right of every family to a decent home.”
U.N. Declaration of Human Rights, 1948 “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food,, clothing, housing and medical care…”
U.S. Housing Act of 1949(and reaffirmed by Congress many times since then) “…a decent home and a suitable living environment for every American family.”
65 Years After FDR… President Obama, 2009 “it is not acceptable for children and families to be without a roof over their heads in a country as wealthy as ours.”
Catholic Bishops of the U.S.-1975 “…decent housing is a right… shelter is one of the basic rights of the human person.”
France: A Right to Housing In France, the right to adequate housing is recognized by law as a fundamental right and recognized since 1995 as a constitutional objective. Since 2007, the right to housing is “justiciable” -- one can take legal action against a public authority for failing to fulfill its obligation to provide a housing solution. http://www.cetim.ch/en/interventions/293/lack-of-access-to-adequate-housing-in-france
6) Federal Housing Legislation Has Many Goals Helping the poor is typically only one of many goals of housing programs. Stimulating the economy, providing jobs, and supporting the banking industry are of major concern.
7) Most U.S. Federal Housing Subsidies: Not Targeted to the Poor Homeowners’ deduction (2012) = ~$68 billion (mortgage interest) ~ 24 billion (property taxes) = $92B Total HUD budget = ~$45 billion
8) A Minimum Wage Job Cannot Cover Average Rent Federal minimum wage of $7.25/hour is not sufficient in any state for a full-time worker to be able to afford an average priced 2-bedroom apartment. In Massachusetts, a full-time worker needs to earn $24.05/hour to afford such an apartment ($1,251). In MA the minimum wage = $8.00/hour; 3x the minimum hourly wage is needed.
9) New Subsidized Housing Looks Like Any Other HousingWayland, MA
Nonprofit-owned Multifamily Affordable Housing (Roxbury, MA, Urban Edge Housing Corporation)
10) Property Values and Affordable Housing Research has found that if housing is well-designed, fits in with the neighborhood and is managed well, there are no negative impacts on property values of neighboring homes.
11) Need for Affordable Housing? Disproportionate housing problems facing households of color, single parent households, elderly, and disabled. Across the U.S., there are about 30 affordable and available rental homes for every 100 extremely low income renter households (those earning 30% or less of area median income). This translates into a shortage of about 6.8 million housing units.
12) Therefore, a Need for… • Multi-faceted housing strategies, targeted to different market conditions • Supply strategies & demand strategies • Regulatory land use strategies • Incentives and sticks • Preservation of the existing affordable housing stock • Articulation of federal, state& local goals • Fair housing; consumer ed.; advocacy • Support for nonprofits... AND
II. We Need to Prevent Another Mortgage Crisis • Acknowledge the dislocations to households, to neighborhoods, to cities • Understand what happened to create the crisis • Assess the strategies being pursued to remedy the immediate problems and to prevent further crises: • too little too late? • regulatory responses? • new ideas?
Causes of Mortgage Crisis Low interest rates; “cheap” money Hysteria about “buying now” Unprepared consumers Originators of loans taking little risk New, creative mortgage derivatives that hid levels of risk Rating agencies not neutral parties Confusion about Fannie low income goals Lax federal regulatory environment
More on deregulation… “…the genius of the market economy, freed of the distortions forced by government housing policies and regulations… can provide for housing better than Federal programs.” -- Report of the President’s Commission on Housing, 1982 (Reagan) • Deregulation of savings & loans (Reagan) • Repeal of Glass-Steagall, 1999 (Clinton) and more… --
Mortgage Crisis Impacts 2009- 2011 –foreclosure started on ~5.3 million owner-occupied homes; approx. 7% of owner-occupied homes in the U.S. Many more delinquent/in default. March 2012-- 2.2 million households, receiving assistance by a federal program. This includes many who did not successfully modify their loan or refinance; far fewer than the goal of 7-9 million assisted homeowners
“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.” -- Alan Greenspan former Chairman, Federal Reserve Board Statement made to the U.S. House Oversight Committee, October 23, 2008
Dodd-Frank, 2010 No bank should be “too big to fail,” by breaking up large institutions, if necessary. Created Federal Oversight Stability Council to safeguard overall finan. sector. Banks banned from any operations that are set up for their own profit. More regulation and transparency for trading of derivative products. Regulatory oversight of credit rating cos. New consumer protection agency.
Dodd-Frank — 3 Years Later • Issuance of regulations (~ 250) has been slow and continuously resisted by members of Congress and the financial industry. • It remains to be seen how effective the new law will be in preventing future reckless and abusive lending practices.
Neighborhoods • Early results of the three rounds of the Neighborhood Stabilization Program appear disappointing. • Although federal funds have been available to enable cities and towns to purchase and rehabilitate foreclosed homes, the process appears to have been too slow and inflexible to reduce adverse neighborhood effects (Immergluck, 2013).
Federal Assistance to Homeowners • counseling programs • voluntary modification programs, often with fairly narrow guidelines about eligibility • providing direct support to financial institutions to promote liquidity and • to a much lesser extent, encouraging principal reduction
1) Weak & timid roll-out of programs; min. direct benefits • Early measures primarily focused on providing counseling; too modest for the numerous households facing serious financial difficulties. • Bush, then Obama, created loan modification programs designed by the financial industry. • These initial programs were largely unsuccessful.
2) Complex, Confusing Names of Programs • Program names -- did not clearly describe benefits being offered or were hard to differentiate; low levels of participation. • Bush – FHA Secure Hope Now Alliance National Foreclosure Mitigation Prog. HOPE for Homeowners • Obama – HARP and HAMP Home Affordable Foreclosure Alt.
3) Investors and Lenders Favored over Borrowers Obama did not radically shift approach Timothy Geithner, former Pres. of NY Fed. under Bush became Secy. of the Treasury January 2009, Fed. began to buy Fannie/ Freddie mortgage backed securities. While providing indirect help for some middle-upper income homeowners, the focus was on promoting liquidity to financial institutions and low interest rates. continued…
The Principal Reduction Alternative program encouraged lenders to lower principal owed. • But modifications had to make more financial sense than foreclosure, or lenders were not obligated to implement them. • Cost/benefit analyses were undertaken from strictly a lender/investor point of view. • No requirement for impacts to be assessed based on net benefits to society or on homeowner or neighborhood needs. • Even if it made financial sense to reduce principal, lenders not required to do so.
4) Loan servicing industry • Orientation more to foreclosure, rather than loan modification. • Based on consistency and volume. • But, loan modifications require specialized attention to each property and borrower. • Case-by-case analyses needed and many guidelines and regs. must be followed. • Individualized attention is costly and more complex than clear default procedures.
5) Carrots/Sticks for Lenders Few requirements placed on lenders/investors; loan mod. programs typically provided only small incentive payments to servicers. Sanctions for servicers not following HAMP guidelines, for example, were non-existent until June 2011, and even then they were modest. Small incentives and lack of serious sanctions could not reverse path to foreclosure by mortgage industry.
6) A Strong Stick that Wasn’t • Opportunity for bankruptcy court judge to reduce principal on primary residence; • Passed by House, not by the Senate; • Not pushed by Obama • If servicers/investors had been threatened with the possibility that a bankruptcy court judge might reduce the principal on the amount owed, this might have stimulated a stronger response from servicers.
The Paths Not Taken • Moral hazard of principal reduction only for some? • Or could we have tried principal reduction for all below a certain income/asset limit? • Or, a simpler, more transparent initiative than the one offered by the FHA Secure program, whereby loans advanced to cure defaults would be repaid upon sale, if a homeowner has positive equity? continued
Or, could nonprofits have played a larger role by helping to acquire, on an interim basis, properties facing foreclosure with homeowners renting from the nonprofit and then having the option of re-acquiring their home when finances stabilized? Although small scale, a similar initiative is being carried out by City Life/Vida Urbana and Boston Community Capital; homes are purchased from lenders following a foreclosure and then sold back to the original homeowners, at the newly adjusted, lower market price.