Brookings: Topics - Housing and Mortgage Markets

Metro Monitor - March 2013

Alec Friedhoff and Siddharth Kulkarni — Thu, 28 Mar 2013 00:00:00 -0400

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Authors

Alec Friedhoff
Siddharth Kulkarni

Is Housing Finance Reform Coming at Last?

Michael Barr — Wed, 06 Mar 2013 00:00:00 -0500

With the nation’s focus on the latest fiscal crisis in Washington, Congress has paid scant attention to necessary reforms to Fannie Mae and Freddie Mac. The Bipartisan Policy Center’s Housing Commission just released its report on housing finance reform, and it should help refocus attention to this crucial issue.

As we move to overhaul housing finance, let us remember how we got to this point. Private risk-taking led to a race to the bottom unconstrained by either market discipline or government oversight. Weak regulation was a recipe for a vicious cycle of deteriorating standards in practices on all levels of the mortgage market: lenders and brokers; Wall Street firms that packaged and securitized these mortgages; and the credit rating agencies that rated them.

Fannie Mae and Freddie Mac were eventually caught up in this destructive race. They had lost market share as standards deteriorated around them, and they made poor strategic choices to try to gain some of that market share back. They took on too much risk in order to grow their retained portfolios, increase returns, and inflate bonuses. The market did not discipline management's decisions because the market assumed Fannie and Freddie had a government backstop. And their regulator lacked standing and authority to substitute the discipline that was missing.

Passage of the Dodd-Frank Act in 2010 now gives regulators the necessary tools to clean up bad practices in the origination, servicing and securitization of mortgage loans. The Act should help end races to the bottom. And Fannie Mae and Freddie Mac are now under strict conservatorship. But unfortunately, legislative reform of Fannie Mae and Freddie Mac has remained stalled since their collapse in Fall 2008.

Perhaps broad bipartisan agreement on a path forward can help to jumpstart the process. Here’s what the unanimous panel of leading Republicans and Democrats agreed:

Fannie Mae and Freddie Mac, still under conservatorship, need to be gradually wound down and eliminated.
We need to get the private sector, through first-loss securitization, private mortgage insurance, and other means, to bear all but the catastrophic losses in housing, not taxpayers.
The 30-year fixed rate mortgage is an important option for American families. American homeowners are not the best bearers of interest-rate risk in our economy. To have a robust and liquid market for such mortgages for most households, there needs to be a government guarantee.
Public insurance, in the form of an explicit, fully funded guarantee of mortgage-backed securities meeting safe guidelines, should be provided. No more unfunded “implicit” backstops for private, shareholder owned entities playing “head’s I win, tails you lose.” Public insurance would only step in if the mortgages defaulted and the private sector first-loss provider went broke.
Access to affordable and sustainable mortgage credit and affordable rental housing is a critical value, and should be funded in part by guarantee fees. A balanced approach to housing requires not only ownership but also rental options. Affordable rental housing also requires governmental support, a government guarantee for certain financing, and tax incentives.

These are important areas of agreement on the path forward.

There are, to be sure, details to be worked out. The insurance entity or “public guarantor” would need to be strong and independent, like the Federal Reserve or FDIC, funded through a portion of the guarantee fee. It would need to have sufficient supervisory and regulatory powers to make sure that the private sector played by the rules—on origination, servicing, securitization, and modifications. Capital requirements on the private-sector first-loss providers would need to be robust and strictly supervised by the public guarantor. We need to be sure that the new system is set up to serve the entire market fairly and efficiently. And the system needs to work well in times of stress, unlike the system we have had.

In the meanwhile, there are a number of steps that can and should be taken under existing law. Regulators need to put in place well-aligned rules for risk retention in securitization, ability-to-pay requirements for originations, and standards for loans to be guaranteed by Fannie Mae, Freddie Mac, and the Federal Housing Administration. New servicing standards, including rules regarding loan modifications, need to be strongly enforced, with careful attention paid to incentives in the system. The size limits for loans guaranteed by these entities need to be gradually reduced, so that fully private securitization predominates in a broader “jumbo” mortgage market. Guarantee fees need to match risks and costs, and not be siphoned off by the Congress for other purposes. The retained portfolios of Fannie Mae and Freddie Mac need to continue to be reduced.

The Senate also needs to confirm permanent Directors for the Federal Housing Finance Administration (the regulator of Fannie Mae and Freddie Mac) and for the Consumer Financial Protection Bureau (responsible for overseeing consumer protection in the mortgage markets).

Now Congress needs to come together around long-needed housing finance reform.

Authors

Michael Barr

Publication: Yahoo! Finance

The Ongoing and Hugely Risky Bailout of the Housing Market

William A. Galston — Fri, 01 Mar 2013 00:00:00 -0500

After a long and wrenching plunge, the housing sector has finally bottomed out and seems to be recovering. According to the latest S&P/Case-Shiller index, home prices rose in nearly every metropolitan area during 2012 and turned in a solid gain of 7 percent nationally. Celebration would be premature, however. The human cost of the housing crash has been fearful. Trillions of dollars of household wealth have evaporated, 5 million people have lost their homes, and 22 percent of the remaining homeowners still have mortgages exceeding the value of their properties. With housing prices still 30 percent below their (admittedly unrealistic) 2006 peak, it will take average homeowners many years to rebuild the savings that their home equity once represented.

Even worse, the federal government’s response to the housing crisis is now becoming part of the problem. When the sector crashed, destroying the balance sheets of Fannie Mae and Freddie Mac, the government had no choice but to take them over, at a net cost to the taxpayer (so far) of $141 billion—by far the costliest bailout in the Great Recession. And the end is nowhere in sight, because the federal government has actually expanded the role of Fannie and Freddie mortgage-backed securities since the crash. Mortgage-backed securities—bundles of mortgages sold to investors—are the principal source of capital for the housing sector. By 2011, securities backed by government agencies—Fannie Mae, Freddie Mac, and Ginnie Mae—accounted for a stunning 97 percent of the MBS market. As for individual mortgages, government agencies accounted for 88 percent of loan originations in 2010, compared to only 47 percent in 2007 and 35 percent in 2006. Without the federal government, it seems safe to say, there wouldn’t be a functioning housing market today at all.

This is no one’s idea of a long-term fix, however. Unfortunately, the Obama administration has otherwise been AWOL on housing. Not only did it do little to assist distressed homeowners, it has not pushed for the fundamental reforms that are needed to prevent future housing meltdowns and to restore the appropriate role of the private sector in housing finance.

Enter the Bipartisan Policy Center with a far-reaching report, “Housing America’s Future.” The BPC report covered a wide range of housing issues beyond single-family homes, including affordable rentals, rural housing, and so-called Naturally Occurring Retirement Communities (NORCS) that allow Americans to age in the neighborhoods where they raised their children.

While all the commission’s recommendations deserve serious consideration, I want to focus on the heart of the matter—its proposals to reform our system of housing finance. The key objective is to ratchet down the involvement of the federal government while bringing the private sector back in. To do this, the commission offers two key proposals.

First, restore the original purpose of the Federal Housing Authority. During the housing crisis, all government agencies dramatically increased the limits on the size of the loans they were prepared to make. The FHA, whose original mission was to assist moderate income and first-time buyers, ended up extending mortgages for as much as $729,750 in high-cost areas. Fannie Mae and Freddie Mac did much the same thing. The commission suggests that these maximum loan limits should be gradually reduced, enabling housing officials to gauge the private sector’s willingness to accept unsupported mortgage credit risk for higher-income borrowers. The government could then refocus its programs—especially the FHA—on bolstering homeownership for credit-worthy borrowers of moderate means.

Second, phase out Fannie Mae and Freddie. As critics had long contended, the ambiguous role of Fannie Mae and Freddie Mac—private entities that enjoyed implicit government backing—led first to distortions of the housing market and then to ruinous losses the burdens of which fell on taxpayers. The BPC commission bites the bullet and recommends their phased elimination.

That does not mean that the federal government would have no role in the mortgage market. The commission recommends establishing a “Public Guarantor” that would cover the kinds of catastrophic mortgage losses that so many lenders experienced during the Great Recession. Borrowers would pay standardized fees into a pool from which the Public Guarantor would draw once both the borrowers and lenders reach the limits of their ability to pay.

The point of this approach is to eliminate—or at least reduce to the absolute minimum—the need for an open-ended draw on taxpayers. To accomplish that goal, the guarantee fees would have to be set at a rate that reflects real risks to lenders, and it would have to be adjusted in light of experience, as is the case with federal insurance for bank deposits. Determining the appropriate fees and monitoring the performance of the guarantee fund would be one of the Public Guarantor’s most important tasks.

But hardly the only one: the new agency would also take on important regulatory functions. For example, it would ensure that private sector participants in the housing finance system are adequately capitalized. It would establish uniform pooling and servicing standards to govern the distribution of mortgage proceeds and losses to investors. It would serve as a gatekeeper for private institutions who seek to serve as issuers, servicers, and private credit enhancers of MBS. And it would establish criteria for mortgages that could be included in MBS and specify standards for mortgage data and disclosures.

No doubt this proposal will come under fire from more than one direction. Many liberals believe that without Fannie and Freddie, mortgage interest rates would be much higher and that many middle-income families wouldn’t be able to afford to own a home. For their part, many conservatives think that federal involvement in the housing market has produced distortions and bubbles and that it’s time to pull the plug entirely. The report won’t please either extreme, because it charts a middle course, retaining a regulatory and catastrophic insurance role for the federal government while eliminating the institutions whose excesses have done so much damage.

While there are no unflawed or uncontroversial housing reforms, the BPC report is the most comprehensive in years, and one of the few designed to achieve agreement across party lines. There are indications that it could spur, at long last, some serious proposals from the Obama administration. The administration reportedly is monitoring the response to the report for signs of an emerging consensus. If the response is broadly positive, the Treasury could unveil its own ideas.

If Jack Lew is looking for a lasting legacy as Treasury Secretary, attacking the unresolved structural issues that Fannie and Freddie pose for the entire financial system would be a good place to start. One thing is clear: if the federal government doesn't reform its involvement in the housing market, the current housing crisis could be a prelude to the next one.

Authors

William A. Galston

Publication: The New Republic

Image Source: © Mike Blake / Reuters

Increasing the Role of the Private Sector in Housing Finance

Phillip Swagel — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Phillip Swagel proposes to increase the role of private capital in housing finance improves incentives for risk taking and investment, reduces taxpayer exposure to risk, and fosters competition and innovation in housing finance.

IMPACT

Deficit Reduction (10-year): $134 billion

Broader Benefits: Improves incentives for risk taking and investment in the mortgage market and market for homes; reduces taxpayer exposure to risk; fosters competition and innovation in housing finance.

INTRODUCTION

This paper proposes reforms of the U.S. housing finance system to increase the role of private capital in funding housing, reduce taxpayer exposure to housing risk, sell off the government stakes in the mortgage finance firms of Fannie Mae and Freddie Mac, and charge appropriate premiums for secondary insurance provided by the U.S. government on housing securities. These measures would generate revenues for the federal government, improve the allocation of capital within the U.S. economy, and focus governmental assistance for affordable housing on those most in need. With reform, private firms would securitize qualifying mortgages into mortgage-backed securities (MBS) and pay for a secondary government guarantee, while considerable private capital would take losses ahead of the government. The U.S. government would support homeownership and access to housing financing, but with transparent subsidies rather than implicit guarantees, better protection for taxpayers, and a clear delineation of the roles of the public and private sectors.

At the center of housing finance reform is an agenda to unwind the conservatorship of Fannie and Freddie that has stabilized these two government-sponsored enterprises (GSEs) since September 2008. Taxpayer support has ensured that mortgages have been available throughout the financial crisis even while other credit markets have been strained, but at a cost to taxpayers of roughly $132 billion so far, including $187.5 billion put into the two firms less $55.2 billion in dividends received (FHFA 2012e).

Moving forward with reform will return some or perhaps a good deal of the money put into Fannie and Freddie to the government, but not necessarily the full amount. Indeed, a key point of this proposal is that actions that maximize the financial return to taxpayers do not align with desirable housing policy. The U.S. Treasury now receives all of the profits of the two GSE firms and might well maximize revenue through an indefinite conservatorship in which private capital is effectively shut out of securitization for government-guaranteed MBS. A reform that brings in private sector competition would not necessarily maximize the value of the government stake in Fannie and Freddie, but it would mean better possibilities for the innovation and beneficial risk taking that go along with private sector incentives. The crisis gave financial innovation a deservedly bad name, but innovation is still valuable in the financial system. This can be seen today: borrowers with imperfect credit histories have trouble obtaining loans, even though low interest rates and the tight rental market mean that monthly mortgage payments for many might be no greater than rent. Housing finance reform that leads to a system with diverse sources of mortgage funding including both guaranteed and nonguaranteed mortgages would provide channels by which private investors can extend mortgage credit to borrowers who are now unable to obtain loans.

Similarly, Fannie and Freddie would be most valuable in a privatization sale if they are allowed to dominate the business of mortgage securitization as in the past rather than face new competition. It would be better policy, however, for reform to foster a system in which new firms can compete in the business of securitization of guaranteed MBS. The (inevitable) underpricing of government insurance gives rise to an implicit subsidy. Competition would help ensure that any such implicit subsidy flows through into lower mortgage rates for homeowners rather than being kept by shareholders and management as in the past when Fannie and Freddie had considerable market power as duopolists. The federal government will not assure any homeowner any particular interest rate. But entry by new firms into securitization and origination will place competitive pressure on banks and securitizing firms that reduces excessive interest rate spreads between yields on MBS and mortgage interest rates paid by homeowners. The importance of competition is illustrated by the present situation in mortgage origination, in which the absence of competition means that low yields on MBS do not fully flow through to reduced mortgage rates for borrowers.

Such a proposal could have a budgetary impact of roughly $134 billion. Any gap between the budgetary recovery and the amount of the bailout will represent the cost of the former housing finance system under which the government provided an implicit guarantee on Fannie and Freddie and thus took on housing risk without proper compensation, while allowing the private shareholders and management to capture part of the benefits of government support for homeownership.

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Authors

Phillip Swagel

Publication: The Hamilton Project

Replacing the Home Mortgage Interest Deduction

Alan D. Viard — Tue, 26 Feb 2013 08:00:00 -0500

In this policy proposal — part of The Hamilton Project's 15 Ways to Rethink the Federal Budget — Alan Viard proposes to replace the mortgage interest deduction with a refundable credit as a way to reduce the artificial incentive for the construction of high-end homes by better targeting the tax breaks for housing.

IMPACT

Deficit Reduction (10-year): $300 billion

Broader Benefits: Reduces the artificial incentive for the construction of high-end homes by reducing and better targeting the tax breaks for housing.

INTRODUCTION

The federal tax treatment of owner-occupied housing cries out for reform. Current tax policy offers unwarranted subsidies for the purchase of expensive homes by high-income taxpayers, but does little to promote homeownership by those of more modest means. To address these problems, I propose to replace the mortgage interest deduction with a 15 percent refundable credit and to reduce the size of the mortgages eligible for the credit while providing transition relief. Although this proposal is not ideal in every respect, it offers an effective way to scale back and better target the tax system’s housing tax breaks while raising revenue in a progressive manner. Over ten years, such a proposal could increase revenues by approximately $300 billion.

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Authors

Alan D. Viard

Publication: The Hamilton Project

Image Source: Ryan McVay

Want a Stronger Economic Recovery? Encourage More Home Refinancing

Karen Dynan — Wed, 20 Feb 2013 13:53:00 -0500

In last week’s State of the Union address, President Obama urged Congress to pass legislation that would help more homeowners refinance. Much of the policy focus in this area has been on proposals that would modify the government’s Home Affordable Refinance Program, which helps borrowers with loans insured by Fannie Mae or Freddie Mac. However, other proposals would go further, such as one that is reportedly being developed to facilitate the refinancing of mortgage loans that are not backed by the government.

Finding ways to encourage refinancing is good policy. The Federal Reserve has done its part: Its asset purchase programs have helped to lower long-term interest rates to historically low levels. The interest rate on new 30-year fixed-rate mortgages is now around 3.5 percent, down from more than 6 percent prior to the financial crisis. Yet, many homeowners appear to have been blocked from refinancing into lower-rate mortgages. Indeed, data from the Commerce Department suggest that the average home mortgage has an interest rate of around 5 percent right now—much higher than the rate available on new loans.

One reason to promote refinancing is that the families that would be helped would tend to be among those less-advantaged and harder hit by the economic slump. Many of the proposals target “under water” homeowners (those with mortgages that are larger than the value of their homes) that are still current on their loans, because these people have had particular difficulty refinancing their mortgages. Based on the 2010 Survey of Consumer Finances, I calculate that median financial assets and median liquid financial assets in this group were only about half as high as the medians for all homeowners. A greater share had experienced job loss over the preceding year (22 percent versus 15 percent), and the median ratio of required debt service payments to before-tax income for this group, at 0.31, was close to double that for the broader homeowner group.

A second reason to support such proposals is that more refinancing would be good for the economic recovery. A family with a $150,000 30-year mortgage with a fixed interest rate of 6 percent that refinances into a new loan with an interest rate of 4 percent will lower its mortgage payments by $180 a month or $2200 a year. The weak retail sales report we saw in the wake of the recent expiration of the payroll tax cut suggests that the spending of many families is very sensitive to the ups and downs in their discretionary monthly cash flow. Thus, we should expect that the interest savings from refinancing will translate into stronger consumer spending and, in turn, promote more hiring and a stronger economic recovery.

It is true that the individuals and institutions that provided the funding for mortgages would lose out if refinancing picks up because they would receive lower interest income. However, these investors lent money for mortgages knowing that borrowers had an option to refinance, and, so far, they have seen much smaller losses than would be the case if it were not unusually difficult for many borrowers to refinance. Moreover, the net effect on the economic recovery should still be positive, as the spending of this group is unlikely to be as sensitive to their losses as the spending of refinancing borrowers is to their gains.

A third reason that proposals to facilitate refinancing make good sense is that, if designed right, they need not impose significant costs on the government. An oft-heard worry is that the programs will expose the government to yet more risk in the housing area. But, for mortgages already insured by the government, lowering mortgage payment burdens would reduce the probability of default. For other mortgages, where proposals typically involve a government entity purchasing the loans before issuing new ones, the risks can be mitigated by limiting the program to homeowners that are in good standing with their mortgages and trying to set the prices paid for the old loans and the interest rates on the new loans to reflect any greater credit risk associated with these borrowers.

Refinancing proposals are not a magic bullet for the economy. Reports vary on how many mortgage borrowers will be helped, but even under generous assumptions—that 10 million borrowers with high spending propensities would achieve interest savings of a couple thousand dollars a year—the programs might raise GDP growth by only ¼ percentage point or so. But, with the enormous burden associated with the still-high rate of joblessness and most economists expecting only tepid economic growth over the coming year, it seems like we should be doing all we can.

Authors

Karen Dynan

Publication: Yahoo! Finance

Long-Term Impacts of Individual Development Accounts on Homeownership among Baseline Renters: Follow-Up Evidence from a Randomized Experiment

Fri, 01 Feb 2013 15:58:00 -0500

Abstract

We examine the long-term effects of a 1998–2003 randomized experiment in Tulsa, Oklahoma with Individual Development Accounts that offered low-income households 2:1 matching funds for housing down payments. Prior work shows that, among households who rented in 1998, homeownership rates increased more through 2003 in the treatment group than for controls. We show that control group renters caught up rapidly with the treatment group after the experiment ended. As of 2009, the program had an economically small and statistically insignificant effect on homeownership rates, the number of years respondents owned homes, home equity, and foreclosure activity among baseline renters.

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Authors

Michal Grinstein-Weiss
Michael Sherraden
William G. Gale
William M. Rohe
Mark Schreiner
Clinton Key

Publication: American Economic Journal: Economic Policy

Image Source: © Mike Segar / Reuters

Envisioning Home

Wed, 30 Jan 2013 18:00:00 -0500

Event Information

January 30, 2013
6:00 PM - 8:30 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

Film Screening and Discussion

During the 1968-1969 tenant strike in St. Louis, Jean King and Richard Baron emerged as agents of social change that transformed and revitalized public housing in the city. The shared vision of Richard, a legal aide-turned-real estate developer, and Jean, a homegrown leader, was to build affordable housing communities, grounded in safe, sustainable neighborhoods.

On January 30, the Metropolitan Policy Program at Brookings and the Urban Institute hosted a screening of the documentary film, “Envisioning Home,” sharing Richard and Jean’s personal memories and conversations illustrating their unique partnership in transforming the face of St. Louis public housing. A panel discussion with Richard and Jean; Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development; Bruce Katz, vice president and co-director of the Brookings Metropolitan Policy Program; and Susan J. Popkin, senior fellow of the Metropolitan Housing and Communities Policy Center at the Urban Institute, followed the screening.

Bruce Katz, Vice President and Co-Director of The Brookings Metropolitan Policy Program, delivers the opening remarks

Bruce Katz, Richard Baron, Shaun Donovan and Susan Popkin lead the panel discussion

Writer and Producer Daniel Blake Smith with Richard Baron, Shaun Donovan, Susan Popkin and Bruce Katz

American Households and the Continuing Economic Recovery

Karen Dynan and Mark S. Sniderman — Thu, 24 Jan 2013 00:00:00 -0500

On November 9, 2012, Mark Sniderman, the Cleveland Federal Reserve Bank's executive vice president and chief policy officer, spoke with Karen Dynan, focusing on the critical role of American households in keeping the country's economic recovery on track.

Sniderman: I want to start by asking you a little bit about being an economist. When did you first know that it was the career for you and, along the way, what have you learned about the profession?

Dynan: I discovered the field of economics in college. I’d always been good in math and sciences and statistics, but I really wanted to do something to help people. When I took my first economics class I knew it was right for me because it gave me a chance to use my skills, but also it provided a wonderful way to help people by affecting public policy. That was really what whetted my appetite.

Later, after college, I went on to become a research assistant at the Federal Reserve Board, working on monetary policy, and that was just such a wonderful experience, being able to learn about monetary policy, understand the ways in which it affects the economy. So that is when I decided to go to graduate school to become an economist.

Now, in terms of what I’ve learned along the way—and I’m still learning—the number one lesson is that economics is really hard. The world is a complicated place and when you’re given your formal training, you’re often told to describe the world using these very simple and stylized models. The entire Federal Reserve System might be described by the letter p for prices and m for money. But you know, as I’ve gone on to work in policy and particularly as we lived through this financial crisis and tried to use policy to respond to the crisis, I’ve learned that the world is far more complicated. There are constraints and incentives that people and businesses and financial institutions face that are far more complicated than any economic model will tell you. You have to think about all these things as you are setting policy.

Sniderman: Your having answered that question that way makes me nervous to ask you the next one, because I’m giving you just a few minutes to deliver a very complex analysis. Coming through the worst financial crisis since the Great Depression, what do you think we have learned and should have learned? And what are the lessons for public policy and for economics?

Dynan: It was a period when some pretty big mistakes were made and there’s lots of blame to go around. The roots of the financial crisis were in the fact that too much risk was being taken. Too much risk was being taken by households. Too much risk was being taken in the financial system by financial institutions—banks, investors. Regulation didn’t do what it was supposed to do. It didn’t recognize the risks as they were building up.

Things might have worked out okay if the housing bubble hadn’t burst, but in fact it did burst. And that caused a lot of these risks to come home to roost. People suddenly found themselves with mortgages they couldn’t sustain. Financial institutions found themselves exposed to losses that they didn’t expect because they didn’t understand how much risk they had been taking.

Sniderman: What’s your take on the way that we as a nation have responded to the crisis legislatively?

Dynan: I think that it’s pretty clear what direction we needed to move in. We needed to move in a direction that put in place a regulatory system that was better able to protect people and protect financial institutions from excessively risky behavior. We’ve redesigned regulations and, yes, the laws are complicated. That’s not surprising—the financial system is very, very complicated. Nobody wants unnecessary and burdensome regulations. I think the regulatory community understands that. But the challenge is going to be how to get the right amount of regulation, given how complicated things are. A lot of it is still being worked out. They’re still studying exactly how we should implement these laws. And I think that’s very appropriate, given how hard the problem is.

What you’re looking for is a balance. You’re looking for the right amount of regulation, such that credit can still flow and people and businesses can still enjoy the benefits of credit while being protected against the worst abuses associated with credit and reducing the exposure of the system to the kind of meltdown we saw during the financial crisis. That is going to be a hard balance to achieve. And I think regulators need to study the problem, they need to try to work out the solution, but they also—after we’ve put in place the solution—they need to continue to study the problem. They need to see whether we’ve gone too far. They need to be ready to be responsive to that.

The roots of the financial crisis were in the fact that too much risk was being taken. Too much risk was being taken by households. Too much risk was being taken in the financial system by financial institutions—banks, investors.

Sniderman: Are there aspects of all the regulations that have been put in place that even today you would look at and say, gee, maybe we’ve imposed too much red tape or too many complications?

The roots of the financial crisis were in the fact that too much risk was being taken. Too much risk was being taken by households. Too much risk was being taken in the financial system by financial institutions—banks, investors.

Dynan: I think in many senses it’s too early to know. What we do know is that, if you think of credit supply as a pendulum, we had swung way too far in one direction, in the direction of easy credit during the lead-up to the financial crisis. And now we’ve swung way too far in the other direction. Credit is still very hard to get and that’s holding back the economy.

Now, we don’t know exactly why. We don’t know if lenders don’t want to lend because of the normal caution that comes with a weak economy or whether it has something to do with the new regulations. That’s something that we’re going to have to study over time. There’s also the whole issue of the uncertainty about future regulation. The Dodd–Frank law is still being implemented and there are parts of it that still require the details to be written down. I think it’s very hard for financial institutions to design their lending strategy until that’s all worked out.

Sniderman: There are differences of opinion among some economists about how to think about regulation. There are some who—to paint the extremes here—say that all we need for markets to work effectively is transparency and disclosure; you want to provide good instruction manuals and provide warnings and tell people how to use these products, but after that it’s caveat emptor. You don’t get into this nanny state with consumers. Other people have the view that people in certain instances are just going to make bad choices. You should prohibit certain products, you should prevent people from harming themselves by outlawing and regulating. Have you formed any views about that tradeoff?

Dynan: One important lesson that we’ve drawn from the financial crisis is that there are real limits to people’s capacity to process information. The fact of the matter is that managing one’s finances is really complicated. It’s complicated even for people like me with training in economics, and I’m married to an economist [Douglas Elmendorf, director of the Congressional Budget Office]. I know how complicated these decisions are. I think it’s been a real lesson that we shouldn’t just be emphasizing providing information.

During the run-up to the financial crisis, people signed on for mortgage products that I’m sure had ample paperwork describing what the payment would be and how the payments might adjust as, say, interest rates moved. But I think we’ve seen evidence that many people didn’t really understand that that’s what they were signing up for. What this tells me is that it’s not just about providing a lot of information; it’s the type of information you provide.

So we really need to think about designing simple, low-cost products that are easily understood by a wide range of the population. I also think we can learn from behavioral economics. Oftentimes when people don’t have the time or ability to understand a complicated financial situation, they take cues from their peers, or from their employment, or even from what they’re seeing on TV. That’s taught us that it’s very important how you set up the defaults of any kind of situation. We need to think harder about what the baseline offering is, because I think people will take that as a piece of advice that, yes, this is a good financial product.

Sniderman: One of the other things that has come up in the aftermath of the financial crisis is a rethinking of housing finance. With the government-sponsored enterprises Fannie Mae and Freddie Mac scaling down, I wonder how you think about what we should be doing with housing policy?

Dynan: Let me start with Fannie and Freddie. The financial crisis illustrated that our pre-crisis housing finance system—which was dominated by Fannie Mae and Freddie Mac—really had severe deficiencies that ended up leading to too much risk in the financial system. In thinking about how we should reform these entities, three principles come to mind.

First of all, I think we need explicit and limited government guarantees for mortgage loans. In the old system, the guarantees were implicit and essentially provided a subsidy to Fannie and Freddie that incentivized them to take on too much risk. So I think we need to move towards guarantees on loans that are explicit and priced to correctly reflect the risk of the underlying loan.

The second principle that I think we need to keep in mind is that securitization really needs to move back into the private sector. Fannie and Freddie have been in conservatorship since 2008, which essentially means that the government has been doing all of their activities, both securitizing the loans and guaranteeing the loans. While I think the government should continue to be a guarantor of certain loans, the securitization activity really should move back into the private sector because the private sector is going to be more efficient at it and is more likely to innovate in ways that save money. And when it moves back, we need to move it back in such a way that there’s not just one or two institutions dominating the whole market, because in that situation you would end up with entities that were too big to fail, which would lead to excessive risk-taking.

Sniderman: The status quo.

Dynan: Right. The third principle is that we need to get a plan in place as soon as we can. Not that we need to move to the new housing system as soon as we can—the housing market is still in a lot of trouble and maybe it’s right for the government to have such a large role right now. But we need to get the plan in place, because right now the situation we’re in is kind of housing finance limbo. It’s very difficult for lenders to go about their activities making mortgage loans when they don’t know what the future mortgage finance environment is going to be. It makes it very hard for them to make loans today, and it makes it hard for them to strategize about the future.

Sniderman: I think we’ve seen in other realms, as with the Basel accords, when they set these new standards, they typically give these long phase-in periods. I think you’re saying, let’s give people a flight path to where we’re headed and a time frame.

Dynan: Yes. I think it would make it easier for everyone to plan, to know where we’re headed.

Sniderman: What are your thoughts about the scale of this? You said we should let securitization become private, but the guarantee system could remain public. Would there be more limited types of guarantees to all forms of owner-occupied housing?

Dynan: One question that’s still under debate is whether we need these guarantees in order to have 30-year, fixed-rate mortgages. If you look across countries, for example, the 30-year, fixed-rate mortgage mostly is a product that’s seen in the United States. Some people would argue that is because we have these guarantees on mortgages. So maybe that’s an argument for having guarantees. More importantly, we need to have the capacity to do enough guaranteeing so that we can keep credit flowing if the mortgage market seizes up again.

I also think the guarantees should be limited. One of the biggest problems we had was that the risk wasn’t priced correctly in the run-up to the crisis. Pricing risk is very hard. If you want to price risk correctly, you need to keep the situation as simple as you can. I think we’re going to want to limit these guarantees to simple, transparent mortgage products with clearly defined parameters.

I think it’s very tough to know what the right level of homeownership is for our country. The experience of the past few years suggested that there are certainly limits to how far you want to push it. At the same time, I think there are clear benefits of homeownership.

Sniderman: It’s commonplace for people to say that we had too much emphasis on owner-occupied housing leading up to the crisis and now we should support a more balanced housing system between rental and owner-occupied. Is that sensible or not?

Dynan: I think it’s very tough to know what the right level of homeownership is for our country. The experience of the past few years suggested that there are certainly limits to how far you want to push it. At the same time, I think there are clear benefits of homeownership. The evidence suggests that putting down roots in a community can benefit the whole neighborhood. On top of that, a benefit of homeownership is that homes still represent a form through which consumers can build assets. I want to qualify that very carefully. In the period leading up to the financial crisis, the mistake was that people thought they could build assets effortlessly by just waiting for their homes to appreciate. We learned that that was a very bad assumption.

But I do think homeownership can help a household build assets through a more traditional financing model, where you have to make a down payment and where you have to make payments that pay off principal, so that you’re building equity in your home. The equity is not locked off, you can still get at it through a refinancing transaction, but it takes some work to get at it. I think that actually could be very useful for households that have trouble saving because they have trouble planning or they have self-control problems.

Over the longer run, I think that means we need a system that not only emphasizes homeownership but also puts weight on creating good rental housing for households for which homeownership is not the right choice.

Sniderman: Recently you’ve looked at this deleveraging process that’s under way. I wonder if you can talk about that a little bit. How far along in the deleveraging process might households be?

Dynan: We have seen considerable deleveraging for the nation as a whole. If you look at household debt for the entire economy, relative to income for the entire economy, you can see that that ratio has fallen back to its level as of 2003. So it sounds pretty good, but I think it’s very important to look beneath that aggregate figure and see what’s going on for different types of households. As it turns out, the deleveraging has been concentrated in certain groups.

One group would be the people who defaulted on their mortgages. They had loans that proved unsustainable and they defaulted on those loans so they no longer have that debt any more. Those households have managed to do quite a lot of deleveraging. There’s a sense in which those households are in a better financial position today as a result. They don’t have the burdensome debt obligations that they were finding so hard to sustain. That’s probably a plus for their situation. That’s not to say that they came by it costlessly. In many cases, they lost a home, they were displaced from their community, and, going forward they’re going to have limited access to credit, which is going to make it hard for them to get through periods when their income is temporarily disrupted. But, when all is said and done, these households did deleverage very dramatically.

Another portion of the decline in household debt in the nation as a whole has to do with reduced new borrowing—people just not taking out loans that they otherwise would’ve taken out. There are probably two things contributing to this. One is that people don’t want to borrow much when the economy is weak because they don’t want to spend much when the economy is weak. So some part of it has been by choice. But another part of it has been forced upon households. Lenders are being super-cautious right now. We can look and see they are requiring higher credit scores and better documentation of income than they did prior to the financial crisis.

For many of those households, consumption is below what it otherwise would be. But the good news is that as credit conditions ease, we’ll probably see households’ consumption rise, which would be a good thing for the economic recovery in this country.

The last group of households I think about are those highly leveraged households that didn’t default. Those are the people that ran up a lot of debt prior to the financial crisis and so have high debt obligations. On top of that, many have seen their home prices fall dramatically, which has put many of them underwater with their mortgages. I’ve researched this group of households and it looks to me that unless you defaulted, you probably haven’t made a lot of progress deleveraging. You just haven’t found a way to really pay off that debt very aggressively, such that the distribution of leverage for the highly leveraged households is pretty similar to where it was a couple of years ago. These households have spending that is very constrained by their situation. And that’s the group of households that we need to worry about and we need to think about what we can do to help.

Sniderman: If you go back to the earliest part of the financial crisis, knowing what you know now, are there things we might have done differently, or is it still pretty elusive and difficult to think about solving?

Dynan: The government put certain programs in place to try to prevent foreclosures and also to mitigate the costs of foreclosures. Those programs have helped many households. At the same time, we’ve still seen millions of foreclosures and many households that are under severe strain trying to make their mortgage payments. That’s creating hardship for them and hardship for their communities. I think the policy response didn’t meet expectations in terms of how much it would help get us through the housing crisis.

Sniderman: In the earlier days of the crisis, there were some voices calling for much more expansive and innovative kinds of programs. Do you think those things would’ve worked? There were sensible things for people to talk about but they were not done.

Dynan: Of course, it’s hard to say for sure but there are some things we do know. Some programs, at least in their early form, had flaws. It turned out that mortgage servicers faced constraints that people who designed loan modification policies didn’t really understand. That really limited the degree to which they could modify mortgages to make them more sustainable for borrowers. I also think that the earliest forms of the program were limited in their scope. Much of the thinking that went into the government’s largest mortgage modification effort occurred before we saw labor markets deteriorate. Those programs helped people in certain situations, but they actually were not targeted towards people who needed a very large amount of help over a short period, as a homeowner who has lost her job might. So the programs fell short in that way.

Sniderman: Looking ahead, we have some demographic changes: Our population is getting older. Most studies say households are not very well prepared for their older years. It seems to be difficult to figure out, from a financial education point of view, how to get households to do better financial planning and increase their savings. Do you have any insights about that?

Dynan: The issue of saving is really important. We know that for the nation as a whole, personal saving is up from where it was prior to the crisis. But again, it’s a question of how that is spread out. Is that increase just a few households doing a lot more saving, or is it broadly spread across the population? We don’t have the kind of data at the household level to answer that question because the data sources you would use are usually released with a lag, so we can’t look at them yet.

But if you look at earlier studies and you think about the anecdotal evidence that’s out there, it’s clear that a lot of households don’t have the savings they need to live as comfortably in retirement as they would like to, or simply the savings they would need to buffer disruptions to income, to allow them to sustain spending if suddenly their income drops. So I think there’s good reason to be concerned about parts of the population not saving enough.

What you do about it from a policy perspective is a hard question. Financial education is tricky. There is not great evidence about what you can do to really move the needle to get people to prepare adequately for retirement and to make sure that they have enough savings so that they’re financially secure. But I’m actually a fan of programs like the automatic IRA idea, which is that you would require businesses of a certain size that don’t have a retirement plan to automatically create a retirement account for their employees, unless the employee opts out. So the employee doesn’t have to participate, but the company is creating a default and effectively providing some advice to its employees about what would be good from the point of view of their financial security. I’m a fan of that.

For the lowest-income households, I am very intrigued by programs that provide some sort of match to incentivize saving. If households do a certain amount of saving, either the government or some other source will match their saving in order to incentivize them to do yet more saving. I think those ideas are very interesting and we should be piloting and studying these sorts of programs.

They need fiscal policy to play a role as well. The challenge there has been designing steps that will support the economy over the short run but contain debt and deficits in the longer run.

Sniderman: Is it just that society has changed or is there something different about the saving habit?

Dynan: The issue of a cultural shift is a really interesting one, and people love to tell the story that our grandparents lived through the Great Depression and were enormously thrifty ever after. We haven’t seen that kind of thriftiness in today’s generation. We see people much more focused on keeping up with the Joneses. That said, we don’t have great evidence as to whether a cultural shift might be occurring. Certainly a lot of people are now asking whether, having lived through what we lived through over the past few years, we’ll see renewed interest in thriftiness for the folks that faced a lot of hardship.

Sniderman: Speaking of our nation’s ability—or inability—to plan ahead, what are your thoughts about the fiscal crisis? What should we be thinking about there?

They need fiscal policy to play a role as well. The challenge there has been designing steps that will support the economy over the short run but contain debt and deficits in the longer run.

Dynan: One thing that’s been a source of frustration for monetary policymakers is that the steps they’ve taken have been constructive for the economy, but they’re by nature limited. They can’t support the economic recovery by themselves. They need fiscal policy to play a role as well. The challenge there has been designing steps that will support the economy over the short run but contain debt and deficits in the longer run; if you take the first part and not the second part, you create a lot of uncertainty about what the future holds, which will hold back the economic recovery. I think we’ve seen a lot of dysfunction in Washington that’s stood in the way of making smart fiscal choices. I hope that we’ll be able to overcome that.

Sniderman: Part of your career was working for an economic policymaking organization [the Fed] and you had a career partly as an academic, and now you’re at what’s popularly called a think tank. How does working as an economist differ in these different settings, and what kind of satisfaction do you get and what challenges do you find in these places?

Dynan: Universities are the traditional career choice of economists, and I think they are a great place to engage with students and to pursue research in an incredibly intellectually rigorous environment. But I do think that anyone who is very interested in policy should consider working for a government agency or for the Federal Reserve System. Besides the generally rewarding aspect of public service, these institutions are places where you really can have a direct influence on the policy leaders who are making important decisions, and that can be very rewarding. That’s certainly what I found when I was working for the Federal Reserve Board just after I left graduate school.

I would say that think tanks also play an incredibly important role in the policy sphere. You don’t have the direct connection with policymakers, or as much of a direct connection, as you would at a government agency or the Fed. But the activities and the research that is done at think tanks are incredibly important.

One big difference for me now is that I come into contact with a far broader range of people as I do my research. I spend time talking to business leaders, to people who work at consumer groups, and to people who work at international agencies, and also I spend time with the general public. I think this kind of exposure has led me to understand far more about how the world really works than I had previously. That’s been very good for my research. It means that my research offers a perspective to policymakers that they’re not necessarily going to get from inside their institutions.

Authors

Karen Dynan
Mark S. Sniderman

Publication: The Federal Reserve Bank of Cleveland

Image Source: © Norbert von der Groeben / Reuters

The Future of Homeownership in the United States Featuring Bank of America CEO Brian Moynihan

Fri, 14 Dec 2012 10:00:00 -0500

Event Information

December 14, 2012
10:00 AM - 11:30 AM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Homeownership has long been synonymous with achieving the “American Dream.” Yet the collapse several years ago of the housing market calls for homeowners, lenders, and the federal government to re-evaluate their expectations and roles to meet the goal of long-term stability, soundness, and fairness in homeownership.

On December 14, the Economic Studies program at Brookings hosted a discussion with Bank of America CEO Brian Moynihan, followed by a panel discussion of industry and policy experts. The discussion focused on the benefits and costs of homeownership and the appropriate role of lenders, investors and government policies, such as tax incentives and housing finance subsidies, to achieve this goal.

Video

Provide a Federal Life Line for America's Destabilized Neighborhoods

Alan Mallach and Jennifer S. Vey — Tue, 11 Dec 2012 15:30:00 -0500

In the years since America’s housing market collapsed under the weight of subprime loans, foreclosures, and the housing bubble, the nation has seen a series of efforts—mostly too little, too late—to help impacted homeowners, creating a new alphabet soup of HERA, HARP, HAMP and HHF. Meanwhile, millions of words have been written, mostly focused on assigning blame to Wall Street greed, homebuyer negligence, and/or regulatory failure.

This wave of collective fingerpointing, however justified, has largely distracted policy makers, and much of the public at large, from realizing how the vitality of many of our cities and neighborhoods has been eaten away by the housing sector’s calamitous fall. After over five years of elevated mortgage foreclosures and collapsing house prices, one city after another is battling a wave of neighborhood destabilization that has turned thousands of once-valued homes and apartments into empty shells. As this has happened, neighborhood housing values have plummeted, deterring investment by developers and prospective homebuyers, discouraging the remaining homeowners from making repairs and improvements, and causing residents to despair for their community’s future. While the housing market in many parts of the country has begun to stabilize, and even improve, far too many areas are still mired in long-term instability and decline.

The scale of this problem is far too great, and the market failures too deeply rooted, for these distressed neighborhoods to recover on their own. Nor do individual cities and states have the resources needed to help rebuild their markets. As Brookings argues in a recent policy brief, these neighborhoods need a lifeline that only the federal government can provide.

More specifically, the brief calls on Congress to establish a new multifaceted Strategic Neighborhood Investment Program that includes both a Qualified Neighborhood Investment Bond program, and a multi-part Neighborhood Investment Tax Credit program. In contrast to many past programs, including the short-lived Neighborhood Stabilization Program, the new Strategic Neighborhood Investment Program is designed explicitly and directly to leverage private investment in rebuilding neighborhood markets.

The Qualified Neighborhood Investment Bond program would authorize $8 billion in qualified state and local bonding authority that could be used for demolition, property acquisition, and rehabilitation, as well as related uses such as improvements to vacant lots. Simultaneously, the Neighborhood Investment Tax Credit program would leverage targeted investment in designated destabilized but still vital neighborhoods. The tax credit program would have three components:

neighborhood investment pools funded by passive investors who would receive a tax credit for investing in the neighborhood
a tax credit for households that buy and restore vacant homes for owner-occupancy, or that buy a home from a developer who has restored it
a special FHA mortgage program for homebuyers

Such a program would be modest in cost, with the potential to leverage four to six dollars in private sector investment for every dollar in federal tax credits. While we project it will fuel the rehabilitation of over 180,000 vacant homes and remove some 400,000 blighting abandoned structures, it will do far more than that by stabilizing the neighborhoods and rebuilding the markets of communities where millions of American families live.

Authors

Image Source: © Kevin Lamarque / Reuters

Cut to Invest: Create New Bond and Tax Credit Programs to Restore Market Vitality to America's Distressed Cities and Neighborhoods

Alan Mallach — Thu, 06 Dec 2012 00:00:00 -0500

To promote market recovery and revitalization of cities and neighborhoods destabilized by recession, job loss, and foreclosures, Congress should authorize the creation of a new, multifaceted Strategic Neighborhood Investment Program that includes bonding authority, tax credits, and a special mortgage program.

These programs, each of which tackles a different aspect of the problem, would together make possible the reuse or demolition of thousands of now-vacant or substandard properties, stabilize distressed neighborhoods, create new homeownership opportunities for young families, foster sustained increases in market value and private investment, and ultimately improve the fiscal and economic health of the nation’s metropolitan areas.

The proposed programs include:

Qualified Neighborhood Investment Bond program. This proposed bond program represents an adaptation of the Restore our Neighborhoods Act of 2012 (HR 4210), introduced in March 2012 by a bipartisan group of representatives. That bill would have authorized $4 billion in Qualified Urban Demolition Bonds to fund the demolition of vacant and abandoned housing in hard-hit communities. The QNIB program uses the same fiscal structure, but provides greater funding flexibility. It would authorize $8 billion dollars in state and local bonding authority, the purpose of which would be to provide a flexible resource for addressing property issues that are hindering the revitalization of distressed cities and towns.

Neighborhood Investment Tax Credit program (NITC). The Neighborhood Investment Tax Credit program (NITC) is designed to be a realistic, cost-effective, market-based vehicle for generating targeted investment in still-vital but severely destabilized neighborhoods. The program would have three elements: neighborhood investment pools; a tax credit for households that buy and restore houses for owner-occupancy; and a special FHA mortgage program for homebuyers. These three elements complement one another, with each playing a clear and critical role in the process of neighborhood revitalization.

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Authors

Alan Mallach

Image Source: © Rick Wilking / Reuters

Cut to Invest: Reform the Mortgage Interest Deduction to Invest in Innovation and Advanced Industries

Bruce Katz — Thu, 06 Dec 2012 00:00:00 -0500

Reforming the mortgage interest deduction (MID) offers an opportunity for the federal government to realize hundreds of billions of dollars in savings over a 10-year period to contribute toward deficit reduction as well as to invest a portion of the savings in policies and programs that are likely to spur more productive and innovative economic growth.

The recommendation to cap the income tax rate at which taxpayers can take itemized deductions, including the mortgage interest deduction, at 28 percent has been proposed by the Obama administration in each of its past four fiscal year budgets. This reform would only affect married taxpayers filing jointly with adjusted gross income (AGI) over $250,000 and single taxpayers with an AGI over $200,000.

A second common proposal has been to convert the mortgage interest deduction from a tax deduction to either a refundable or non-refundable tax credit, and to lower the cap on the overall mortgage value eligible for the subsidy. This course of action was proposed in various forms in reports by both of the major bipartisan deficit reduction committees in 2010:

The Bipartisan Policy Center’s Debt Reduction Task Force Plan (Domenici-Rivlin) proposed shifting the MID to a 15 percent refundable tax credit to all taxpayers, lowering the mortgage limit from $1.1 million to $500,000, and eliminating the provision that allows taxpayers to deduct mortgage interest for second homes and home equity loans

The National Commission on Fiscal Responsibility and Reform’s plan (Simpson-Bowles) largely mirrored the Domenici-Rivlin plan for reforming the MID, but instead called for a 12 percent non-refundable tax credit

In recent months, a third common reform proposal has been to implement an overall cap of between $25,000 and $50,000 on itemized deductions, which would include the MID, the deduction for charitable contributions, and other subsidies in the tax code.

Adopting any of these proposals for reforming the home mortgage interest deduction would:

Raise hundreds of billions of dollars in income tax revenue over ten years for the federal government to contribute to deficit reduction and investment in productive and innovative growth

Create a fairer balance in benefits among lower, middle, and upper income homeowners

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Authors

Bruce Katz

Strengthen Federalism: Enact Legislation Supporting Residential Property Assessed Clean Energy Financing

Devashree Saha — Tue, 13 Nov 2012 00:00:00 -0500

Congress should enact legislation that supports residential property assessed clean energy (PACE) programs in the nation’s states and metropolitan areas. Such legislation should require the Federal Housing Finance Agency (FHFA) to allow Fannie Mae and Freddie Mac to purchase residential mortgages with PACE assessments while at the same time providing responsible underwriting standards and a set of benchmarks for residential PACE assessments in order to minimize financial risks to mortgage holders.

Along these lines, congressional support of residential PACE programs would:

Send a strong signal that the U.S. remains fiercely committed to investing in smart, innovative financing structures that can catalyze the energy retrofit market

Enable states and local governments—many of which suspended their residential PACE programs in the wake of the FHFA ruling—to design and implement such programs in their communities

Save money for homeowners by reducing energy costs

Create new jobs and career opportunities in both the energy efficiency and renewable energy industries

Reduce greenhouse gas emissions and so produce significant climate benefits

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Authors

Devashree Saha

Is a Household Debt Overhang Holding Back Consumption?

Karen Dynan — Sun, 30 Sep 2012 11:38:00 -0400

Editor's note: this paper was published in the Spring 2012 edition of the Brookings Papers on Economic Activity. In accordance with that journal's open access policy, this paper's data and programs are also available for download (ZIP).

Abstract

The recent plunge in U.S. home prices left many households that had borrowed voraciously during the credit boom highly leveraged, with very high levels of debt relative to the value of their assets. Analysts often assert that this “debt overhang” created a need for household deleveraging that, in turn, has been depressing consumer spending and impeding the economic recovery. This paper uses household-level data to examine this hypothesis. I find that highly leveraged homeowners had larger declines in spending between 2007 and 2009 than other homeowners, despite having smaller changes in net worth, suggesting that their leverage weighed on consumption above and beyond what would have been predicted by wealth effects alone. Results from regressions that control for wealth effects and other factors support the view that excessive leverage has contributed to the weakness in consumption. I also show that U.S. households, on the whole, have made limited progress in reducing leverage over the past few years. It may take many years for some households to reduce their leverage to precrisis norms. Thus, the effects of deleveraging may persist for some time to come.

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Karen Dynan

Laying the Groundwork For Change: Demolition, Urban Strategy, and Policy Reform

Alan Mallach — Mon, 24 Sep 2012 00:00:00 -0400

According to the Census, the total number of vacant housing units in the United States grew by over 4.5 million from 2000 to 2010, an increase of 44 percent. While empty houses are everywhere, they are disproportionately found in many older industrial cities, particularly those that have lost much of their population and job base over the past several decades. Boarded houses, abandoned factories and apartment buildings, and vacant storefronts are a common part of the landscape in large cities like Detroit, Buffalo, and Philadelphia, and a host of smaller cities such as Flint, Gary, and Youngstown.

Many of these vacant buildings will have to be demolished over the coming years. Some may be too far in disrepair to be restored to productive use; in other cases, the demand or the resources for rehabilitation may not exist. Many of these properties are health and safety hazards, blighting their surroundings and devaluing their neighbors’ properties. Still others may need to be torn down in order to make way for new redevelopment important to their cities’ future vitality.

Not all empty buildings need to be demolished: Many can be productively reused, either for the same purpose as before or in new and different ways. At the same time, tearing down those that can’t be reused might not be a high priority, at least in the short term. With limited funds available, localities must be strategic about targeting those demolitions that will most benefit their neighborhoods and residents. Demolition, in short, should not be an end in itself, but rather a step in the process of creating stronger, healthier communities.

The purpose of this paper is to look at demolition in the framework of larger community stabilization and revitalization strategies, and, within that context, to put forth recommendations for how to undertake demolition in the most cost-effective and productive fashion. It conveys three primary messages:

Large-scale demolition, thoughtfully and responsibly carried out, is a necessary step in the process of rebuilding the nation’s distressed older cities. This need is driven by two factors: the macro issue of supply and demand, which has led to a vast oversupply of buildings in many cities, and the more micro issue of how vacant abandoned structures impact their blocks and neighborhoods.
Demolition is a costly, complicated process. Demolition is a complex process involving a variety of steps, activities, and regulatory requirements, each of which adds cost to the final outcome.
Strategic, cost-effective demolition is vital to stabilizing and revitalizing cities and their neighborhoods. Given both the critical need for large-scale demolition in many older communities, the costs associated with it, and the limited resources available, policymakers and practitioners need to be strategic in their decisions about which buildings to demolish, and in what areas—while getting more creative about finding the resources needed to do so.

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Authors

Alan Mallach

How Bright is the Housing Bright Spot?

Karen Dynan — Fri, 21 Sep 2012 10:30:00 -0400

The last few months have seen a mounting consensus among experts that the housing market has bottomed out and begun to recover. Having waited years for this turning point, people have rightly made much of the development. The term “bright spot” abounds in the recent news coverage.

But, our optimism should be tempered. As yet, the gains in housing construction, home sales, and home prices have been quite modest in comparison to the spectacular drops we saw earlier. For example, the rate at which builders are starting single-family homes has retraced only about 10 percent of its earlier plunge. At a little above 500,000 units (at an annual rate), the recent pace of housing starts is much less than half that seen in the late 1990s, prior to the beginning of the housing boom.

The current low levels of housing activity suggest a lot of scope for growth that could stoke the broader recovery. In fact, though, the pick-up does not seem to be happening fast. The pace of single-family housing starts has risen only about 100,000 since the summer of 2011. Housing investment has contributed only a couple of tenths of a percentage point to overall GDP growth over the last year, and there has been little change in the number of jobs in residential construction.

The relatively meager gains in home prices in recent months are also not doing much to support economic growth. During the housing boom, rapid home price appreciation led to large increases in household wealth, which, in turn, gave many homeowners both the willingness and wherewithal to spend voraciously. The plunge in home prices between late 2006 and early 2009 caused roughly $6 trillion of household wealth to evaporate, the equivalent of about 7 months worth of after-tax income. Data released by the Federal Reserve this week show that aggregate housing wealth, like home prices, has continued to show very little rebound (see Figure 1). A much bigger turnaround will be needed to see significant “housing wealth effects” on economic growth.

Moreover, the lack of rebound in home prices is not helping the 11 million “under water” homeowners for whom the value of their mortgage exceeds the value of their home: Their excess leverage is making it difficult for them to finance spending with new borrowing and, in many cases, to realize lower mortgage payments by refinancing into lower-rate loans.

When it comes to thinking about ways to hasten the recovery in housing, policymakers might take note of the similar pattern of single-family housing starts across the four regions for which the Census Department releases data. In all regions, housing starts moved sideways after the bust, with some modest uptilt over the past year or so (see Figure 2). The similarity occurs despite important differences in the employment situation and borrower distress across regions, providing support to the view that addressing broad issues—such as the high rate of joblessness, impediments to lending, and uncertainty about future economic conditions and policies—is key to boosting activity.

Authors

Karen Dynan

How We're Doing Ahead of the Presidential Election

Ted Gayer, Domenico Lombardi and Darrell M. West — Sun, 26 Aug 2012 00:00:00 -0400

Index #13: Last Five Quarters

Will the 2012 presidential election follow historical trends and benchmarks, or are more complex dynamics at play this year? For the last "How We're Doing" Index ahead of Election Day, a team of scholars at the Brookings Institution looked at U.S. economic growth over the past five quarters, which has decelerated while the "fiscal cliff" and the European financial crisis loom. Historically, high unemployment and poor economic growth have doomed incumbents, yet President Obama's poll numbers remain relatively stable. Will the November election turn on the state of the national economy, or might relatively better economic conditions in key swing states be enough to carry Obama to reelection?Continue reading below chart »

Related Materials:
Past How We're Doing indexes »

See data sources »

The U.S. economy continues to grow, but at a discouraging pace. U.S. real gross domestic product increased at an anemic 1.5 percent annual rate during the second quarter. While employment conditions strengthened earlier this year, new job growth has averaged about 100,000 positions per month since April. That's not enough to keep the unemployment rate from rising. The one bright spot has been the recent moderate improvement in the long-depressed housing market. The glut of houses is beginning to subside, leading to more housing construction and higher prices.

The economic outlook is not expected to improve much, if at all, heading into the election. Growth is likely to remain below 2 percent in the third quarter, while the unemployment rate will stay above 8 percent. Concern is growing that Congress won't act to avert the "fiscal cliff" of tax increases and spending cuts set to take effect in January, which the Congressional Budget Office has predicted would lead the United States into a recession.

The crisis in the euro zone is worsening, and the threat to the global economy escalating. Government bond yields of Italy and Spain have peaked vis-à-vis those of Germany, fueling speculation about the economic and political sustainability of the euro as their common currency. Partly because of continued uncertainty in Europe, the International Monetary Fund has revised growth projections for China and India downward for this year and next. In turn, the outlook for U.S. exports to Europe and the emerging economies is deteriorating. Above all, the dampening effect of the European crisis is likely to delay investment and hiring decisions, further slowing the anemic recovery we have seen so far in the United States.

What does this all mean for the U.S. presidential election?

It's important to remember that this is not a national campaign but 50 simultaneous state elections - and the outcome for 40 of them can be predicted with some accuracy. This year, election observers shouldn't obsess over national unemployment figures. The key is to watch economic and political indicators in the 10 states that are closely contested: Ohio, Florida, Pennsylvania, Nevada, Colorado, Iowa, Virginia, North Carolina, New Hampshire and Wisconsin.

Many of the swing states are doing better economically than the country as a whole. Ohio, for example, has a 7.2 percent unemployment rate, more than a point below the national average. And recent polls in several swing states show Obama running ahead of his national polling margins.

The biggest threat to Obama is a late surge for Mitt Romney, which could be precipitated by a collapse in the euro zone and further weakening of the domestic economy. In a bad economy, late-deciding voters often break for a credible challenger, so Obama's team needs to establish a large lead now, before any further economic weakening. Presidents who fail to set the tone early usually end up losing, as Presidents Jimmy Carter and George H.W. Bush did.

So, yes, "it's the economy, stupid." But this year, it's an economy that stretches from local indicators in just 10 key states to the threat of national and perhaps global economic weakening. Obama needs to hope that the swing-state economies at least stay stable and that any bad news from abroad waits until after Nov. 6.

Sources:

GDP growth:
U.S. Bureau of Economic Analysis

Unemployment rate:
U.S. Bureau of Labor Statistics

Percent unemployed for more than 26 weeks:
U.S. Bureau of Labor Statistics

Disposable personal income:
U.S. Bureau of Economic Analysis

Consumer inflation rate:
U.S. Bureau of Labor Statistics

Dow Jones Industrial Average:
Yahoo! Finance

Consumer sentiment:
Reuters/University of Michigan survey of consumers

Consumer spending:
U.S. Bureau of Economic Analysis

Months' supply of new homes:
U.S. Census Bureau

Interest rate on 30-year fixed mortgage:
Freddie Mac

Metro area employment rates:
U.S. Bureau of Labor Statistics

Metro area home price growth:
Case-Shiller Index

U.S. combat fatalities, Afghanistan:
icasualties.org

Civilian fatalities, Iraq:
Brookings Iraq Index

Approval ratings of president and Congress:
Gallup

Percent of Americans "satisfied with the way things are":
Gallup

Authors

Publication: The Brookings Institution and The Washington Post

Brookings: Topics - Housing and Mortgage Markets

Metro Monitor - March 2013

Downloads

Authors

Is Housing Finance Reform Coming at Last?

Authors

The Ongoing and Hugely Risky Bailout of the Housing Market

Authors

Increasing the Role of the Private Sector in Housing Finance

Downloads

Authors

Replacing the Home Mortgage Interest Deduction

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Authors

Want a Stronger Economic Recovery? Encourage More Home Refinancing

Authors

Long-Term Impacts of Individual Development Accounts on Homeownership among Baseline Renters: Follow-Up Evidence from a Randomized Experiment

Authors

Envisioning Home

Event Information

American Households and the Continuing Economic Recovery

Authors

The Future of Homeownership in the United States Featuring Bank of America CEO Brian Moynihan

Event Information

Video

Audio

Transcript

Event Materials

Provide a Federal Life Line for America's Destabilized Neighborhoods

Authors

Cut to Invest: Create New Bond and Tax Credit Programs to Restore Market Vitality to America's Distressed Cities and Neighborhoods

Downloads

Authors

Cut to Invest: Reform the Mortgage Interest Deduction to Invest in Innovation and Advanced Industries

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Authors

Strengthen Federalism: Enact Legislation Supporting Residential Property Assessed Clean Energy Financing

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Authors

Is a Household Debt Overhang Holding Back Consumption?

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Authors

Laying the Groundwork For Change: Demolition, Urban Strategy, and Policy Reform

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Authors

How Bright is the Housing Bright Spot?

Authors

How We're Doing Ahead of the Presidential Election

Sources:

Authors