Publications

Below are links to several recent publications:

1. CFA Institute re: speculation


2. Scotsman's Guide re: self-storage

I'll have another one shortly re: the future of multi-family development.

Freddie Mac

Below is a clip buried in Freddie Mac's 10-Q for the 2nd Quarter of 2009. Take a close look at the last line - if Freddie ends up selling its tax credit portfolio, the terms have the potential to change the affordable housing industry for a long time to come.

LIHTC Partnerships

We invest as a limited partner in LIHTC partnerships formed for the purpose of providing equity funding for affordable multifamily rental properties. The LIHTC partnerships invest as limited partners in lower-tier partnerships, which own and operate multifamily rental properties. These properties are rented to qualified low-income tenants, allowing the properties to be eligible for federal tax credits. Our investments in LIHTC partnerships totaled $3.9 billion and $4.1 billion as of June 30, 2009 and December 31, 2008, respectively. Although these partnerships generate operating losses, we realize a return on our investment through reductions in income tax expense that result from tax credits. Our exposure is limited to the amount of our investment; however, the potential exists that we may not be able to utilize some previously taken or future tax credits. In consultation with our Conservator, we are considering potential transactions to realize the value of these interests, if market conditions are appropriate.

Long Two Months

Just finished two books on the subjects of cities, complexity, chaos theory, etc. The first was "The Self-Organizing Economy" by Paul Krugman. This book frustrated me for about 10 years, but I've finally made my way through it. The topic is fascinating, the writing less so. But, all in all, worth paying attention to (the guy won a Nobel Prize for his work in this area).

The second was "Complexity: The Emerging Science at the Edge of Order and Chaos" by M. Mitchell Waldrop. More like a history/story re: how the study of complexity began to take shape. The tough thing about this book is that it combines technical issues without much background info so while it is sort of interesting the lay person can/should skim various sections (if you are like me, you'll know when you get there because your eyes will glaze over).

Plus, I've since knocked down a couple of articles on the subject as well.

And, I found an interesting website on the topic: http://blog.casa.ucl.ac.uk/

Still lots more to learn and understand before getting back to some serious writing.

Micro or Macro?

For the last month I've been toying around with an idea that is both old and new for me - how the behavior/actions of individuals leads to contradictory outcomes for the group/whole. For example, I carry a gun for security, but then so does my neighbor, until we are all carrying guns - do we end up with more or less shootings both individually and as a whole? Or, I leave for work at 7:30 to get to work on time (i.e. I've allowed a little extra time in my current commute), but my neighbor does the same and so do a lot of other neighbors - yes, we may all get to work on time, but have we increased both individual commutes from 10 minutes to 20 minutes due to bottlenecks in traffic that would not occur if the departure times were coordinated?

Of course, once you think about it, you start to see this issue in a lot of things, but the first place I recall really thinking about it was working on my thesis regarding housing and school desegregation. As part of my research, I came across Thomas Schelling's book, Micromotives and Macrobehavior (). About that same time, A Beautiful Mind (the movie) was released and addressed similar topics regarding game theory (i.e. generally, the idea the behavior of a given agent results in/is affected by/and affects the behavior of others, which then affects the behavior decision making of the original agent, etc.). Since then, this issue has rattled around in the back of my head a lot but in vague ways.

The issue has some new aspects for me too. The more I've looked into it, the more I realize it has been under serious study for the last 40 years. Threads of this issue are found in Chaos Theory, Complexity, the Sante Fe Institute, etc. My particular interest is in the combination of geography and microbehavior (i.e. how/what we can learn from spatial data and the decisions of households that ultimately drives the formation and change of regions, cities, and neighborhoods). I think this bottom/up approach may shed serious light on policies aimed at desegregation, urban growth and decline, regionalism, and similar topics, perhaps much more than the traditional top/down approach (i.e. we have a city, how/why does it look the way it does).

So, expect to see more on this site as I dig deeper. Right now, I am in the middle of 20 articles, two books, and some serious math refreshing on the subject. If I survive that, maybe I have a new interest. If not, well, there's always gardening.

Off the Beaten Path

I recently attended a Sagamore Institute for Policy Research (www.sipr.org) event with John Watkins (American Chamber of Commerce in China). I also just started Zakaria's "The Post-American World". Both of which have me thinking - is our relationship with China fundamentally different than all previous superpower relationships?

I think the answer is mostly yes because this relationship and/or conflict is primarily economic and cultural, not ideological, religious, or militaristic in nature (other than to protect economic interests). What ideology is China pushing? Communism? It doesn't seem that even China suggests communism as a viable form of government. What religion is China promoting? Buddhism (can a string be pushed)?

Some would argue that all superpower contests are economic in nature, perhaps so, but I would argue that they are often due to other causes and the economics become one form of weapon/defense. What happens when such a conflict is economic in nature? Here are some ideas:

1. military power is important but not omnipotent. It is important relative to a power's ability to protect its economic interests, but the interests themselves can be purchased rather than won by conflict.

2. the rule of law across countries (i.e. multi-jurisdictional arrangements) becomes more important than the rule of law within countries (i.e. a police force, a domestic judiciary, etc.).

3. transportation options (e.g. sea routes, pipelines, etc.), communication channels (e.g. satellites, a multinational presence, etc.), and economic blocs are more important than military alliances.

4. economic forms of organizations (e.g. partnerships, corporations, etc.) become more powerful than political forms of organization (e.g. city, states, nations, etc.).

The Soloist

Linda and I attended a screening of The Soloist tonight - new film about a reporter that writes a story about a homeless man, befriends him, and ultimately struggles with his relationship to the homeless man/his ex-wife/etc. Stop reading if you like to see the movie before knowing the ending.

A couple of things I am sure of and a couple of things I am not. I am sure this movie accurately represents the difficulty many people face when engaging with the homeless. First, there is the frustration of getting plugged in to the "system". Seems like it would be easy - just volunteer/show up/be there - but it rarely is, at least on anything more than a one-time basis. Second, the issue of homelessness is often intertwined with other complicated problems like mental illness (see comments below). Third, once you get involved, you find that it is not necessarily a problem that wants a solution, or at least that wants a solution that you want (if this doesn't make sense, go see the movie). It is this last issue that I think discourages most volunteers - volunteers want solutions/fixes that make them feel good whereas most issues like this are in want of relationships (hey, could it be that liberals and conservatives can find something in common here??).

I am not sure this movie appropriately represents the homeless population at large. It focuses a lot on mental illness. This is certainly one issue closely tied to some homeless persons. It does not address many other correlated issues (e.g. substance abuse, domestic violence, etc.). And it does not reflect "economic" homelessness (i.e. homeless issues caused primarily by households that cannot afford a subsistence level of housing). This is the part that concerns me about a movie intended for the general public - does it create a perception that all homelessness is untreated mental illness?

Overall, the movie is well written, has some some great music (if you like classical cello), etc. It is great to see a full length pop movie intended for a general audience that addresses homelessness and won't be in the documentary category. But, homeless advocates will have to guard carefully against reviews that simply conclude homelessness and mental illness are one and the same.

Affordability Paradox

I came across a previous research project this week that I thought some folks might find interesting, this was done while I was at INHP. It addresses how you can both have one of the affordable housing markets in the country (based on the median income and house price) and yet have homeless (because the distribution away from the median is uneven). Cut and paste the link below into your browser.

http://docs.google.com/fileview?id=F.4c3f10b0-98fd-470c-9759-2c4dfa5ecc83&hl=en

A Natural Right to Housing (part 5 and final)

I started this series of posts defining "rights" into three categories: natural, social, and economic. I chose to focus on natural rights in particular. Then, I stepped back to look at what three of the big thinkers from western civilization, namely Hobbes, Locke, and Rousseau, had to say about natural rights. This final post will summarize my own thoughts on the natural right to housing (or shelter), which admittedly have evolved over time as I have considered the issue.

The first and most basic premise that seems to underlie all discussions of natural rights is the right to self-preservation so long as others' right to self-preservation is not harmed. This seems logical and reasonable to me. Suicide is viewed negatively in many societies not just because of its effect on those that remain behind, but because it is the most blatant form of violation of this premise. Of the items needed for self-preservation, none are more basic than food and shelter (probably clothing too but that's a different argument).

Saying that a right to food and shelter is fundamental to self-preservation is not the same as saying that any one has a right to "take" it from someone else or that any one should be "given" these things. Instead, it is saying that every one has a right to provide these things for themselves. This is inalienable, it cannot be done away with by majority rule, by law, or even by one's own consent.

Which brings me to a tough question regarding property - what happens if we have either titled all land to private ownership, restricted the use of public (common) land in such a way that it cannot be used to provide food and shelter, or restricted the use of private property such that it cannot provide subsistence shelter (e.g. building codes or zoning)? In such a setting, common in today's world, then we have alienated the natural right of humans to provide their own shelter and food. This then is where a right to housing becomes critical to today's society and must take on mitigating policies.

What kind of mitigating policies can offset the alienation of such a right? It is difficult to do because implied in this right to shelter is autonomy, self-reliance, and choice. Most attempts to create mitigating policies will be a compromise of these features at best.

One example of a mitigating policy is fair share housing. Under this type of policy, every community must provide a portion of housing that is set aside for those that otherwise cannot afford housing. Why is this fair? Because the community's restrictions are in large part what prevents humans from sheltering themselves. It seems to me that the less common land that is available or the more restrictive the use of private property, the more broad the policy should then be.

A second, and more controversial, public policy response is squatting or homesteading. In this case, private property that is not being "used" can be used by, or even titled to, an active resident. This is similar to some of the writers noted above referencing that it is "labor as applied to things" that create property and so if it is not being used then it is not really property at all. I have more difficulty with this type of policy given that simply not using property is not the same as saying it is not useful to the owner.

Am I in favor of a right for all people, regardless of their behavior, to be housed? As far as the housing part of that question, yes (i.e. human is human and carries with it a right to be sheltered). But, that does not also make all behavior acceptable (i.e. drunk is drunk and does not also carry with it a right to be housed). It seems to me these are two separate questions - what is the right to housing and what is acceptable behavior? There are many other examples that come up as well (e.g. mental illness, substance abuse, victims of crimes, etc.) and I would conclude in a similar way.

Should we simply create more shelter beds? No, I am not suggesting a right to congregate living. In fact, in a state of nature, it is exactly not congregated living. Rather, the right to housing must reflect humanity's desire for autonomy (hey, I am a Midwesterner, we are nothing if not libertarians at heart). Perhaps shelter beds are appropriate for some temporary and emergency settings, but not as a matter of long standing policy.

Other forms of supply (e.g. tax credits for housing, government insured mortgages, etc.) or demand (e.g. Section 8 vouchers) subsidies are also possible. These all hold the potential for ensuring the right to housing but each must be evaluated on its merits (i.e. efficiency, effectiveness at addressing the local housing issue that is causing some to be unsheltered, etc.).

In summary, yes, a natural right to housing exists. We have committed the most egregious of sins by both alienating this right and not offering sufficient mitigating policies to offset the violation. Continuing to violate this natural right harms our community and must be addressed as a question of economics and justice.

A Natural Right to Housing (temporary sidenote)

Just in case you were thinking "he's out of his mind to be thinking about a 'right to housing' as a public policy issue that should be carefully considered," cut/paste this link to the article from www.slate.com. Two steps crazy or two steps ahead?

http://www.slate.com/id/2214544

A Natural Right to Housing (part 4c): Rousseau

In part 4a, I outlined Rousseau's thoughts about the natural state of humans, namely that we are equal by nature, that we form societies initially for social purposes, that the division of labor introduces the concept of property, and that governments are formed by the wealthy to protect their property. In part 4b, I outlined Rousseau's thoughts about the role of government - government should avoid the arrangements that allow for the creation of inequality, let alone be progressive about reversing it. Now, in part 4c, I'll discuss his On Social Contract, the primary work for which he is known and which outlines what he considers a legitimate government to be.

Rousseau reestablishes an earlier claim that the persons are endowed with a desire for self-preservation (and that this endowment is inalienable), that power or strength is not a legitimate source of governance, and that agreements are the basis of authority among persons. He claims that legitimate authority comes when "each of us puts his person and all his power in common under the supreme control of the general will, and, as a body, we receive each members as an indivisible part of the whole." In this way, Rousseau argues that a "houses make the town but that citizens make the city."

On the issue of property, Rousseau's perspective regarding governments becomes more assertive. Previously, he argued that government was unjustly formed to protect the property of the wealthy. In the Discourse on Political Economy his emphasis shifted to a more active and assertive role for government in creating equality. In On Social Contract, he argues that every man has a right to what he needs, no man is just in claiming more, and that the community governed by laws assures us all of possession of at least something. But, he argues that such possession is always subordinate to the community's right to everything (e.g. imminent domain).

Rousseau then goes on to discuss issues less applicable to my subject (i.e. executive power and legislative power). He concludes by saying that good government can be measured and ranked very easily - look at where the population increases naturally ("statisticians, it is now up to you; count, measure, compare.").

So where does Rousseau conclude on my question of a natural right to housing? Given his explicit earlier writings regarding shelter as being something that is freely available from nature, he seems to believe it is a "natural right" but also something that has already been provided and therefore needs no intervention from human kind. Many of his arguments lean towards economic equality, with government being the institution that provides the foundation for this to occur. In this sense, to have a person ill-housed while others are well-housed would be counter to Rousseau's philosophy.

In part 5, I'll conclude this topic with a summary of my own thoughts.

A Natural Right to Housing (part 4b): Rousseau

In part 4a, I described Rousseau's Discourse on Inequality. Rousseau uses the Discourse on Inequality to describe humans in a state of nature where people are "savages" bound only by self-preservation and a "do as little harm as possible" rule. He then walks through how societies are formed initially for social purposes, but ultimately begin to use a division of labor to increase material well being. This eventually leads to the creation of property, laws, and an "unnatural" inequality. I will now turn to his Discourse on Political Economy and then in part 4c, I'll conclude with a review of On Social Contract, Rousseau's main thesis about how government should be formed.

Rousseau argues that "since all society's commitments are reciprocal by nature, it is impossible to put oneself above the law without renouncing its advantages, and no one owes anything to anybody who claims to owe nothing to anyone else." This reciprocity is central to Rousseau's thinking about the role of government and the basis of society. He says "is it not the commitment of the body of the nation to provide for the protection of the least of its members with as much care as for that of all the others?" Rousseau is even more radical in economic terms, arguing that it is not for government to create economic equality by taking wealth away from the rich or by creating subsidies for the poor, but rather government should eliminate the means that allow the rich or the poor to come into being.

Rousseau is moving away from his view of government in Discourse on Inequality where he viewed government solely as a means of furthering the wealthy's self-interest in protecting property. He is now promoting a view of government that protects the rights of citizens but also requires providing for basic needs (public education already having been defined as a basic obligation of government). He spells out three issues to consider when developing tax policy that underline this change: 1) proportional taxation (i.e. those with more should pay more), 2) subsistence exemptions (i.e. that basic necessities should not be taxed at all), and 3) the benefits derived from government (i.e. that the rich benefit more than the poor).

Next, in part 4c, I'll address Rousseau's primary treatise, On Social Contract, where he more explicitly spells out how he thinks government should be formed.

A Natural Right to Housing (part 4a): Rousseau

Previous posts a) defined "natural" rights, as opposed to other types of rights, b) reviewed Hobbes's Leviathan, and c) reviewed Locke's Two Treatises of Government. We now to turn Rousseau.

I am going to break this discussion into three parts, Rousseau's Discourse on Inequality (1755), Discourse on Political Economy (1755), and On Social Contract (1762).

Rousseau starts the Discourse on Inequality by stating this his purpose is determine when "right" replaced violence and "nature" was subjected to law. While Rousseau acknowledges that true equality may never have existed, he felt that understanding equality conceptually helps us to understand what is meant by natural rights and our current status. In summary, Rousseau believes inequality is wrong and generally did not exist in nature, to know why there is inequality we must understand humans, to understand humans we must understand human nature, and to know human nature we must strip away their current environment, circumstances, and society.

Rousseau reduces human nature to two features (one of which will sound familar): 1) the desire for self-preservation and 2) a repugnance at seeing others suffer or perish. In this way, Rousseau claims that humans are naturally good and that all persons should be governed by a sort of golden rule - "do what is good for you with the least possible harm to others."

One quick note regarding shelter - Rousseau believed that the Earth provided sufficient shelter for humans without any necessary modification. In such a world, humans live a simple, uniform, and solitary life. If they don't have shelter, it is because they do not need it (i.e. have learned or been so endowed as to survive without it).

Rousseau then passes from a state of nature (i.e. life without society), through a state of simple society (i.e. where people may live together for social purposes but each person tended to themselves), to a state of current society identified by its division of labor. Property is introduced due to the division of labor and human misery (i.e. avarice, ambition, and wickedness) begins. And so, natural endowments that lead to inequality and may have been imperceptible in a state of nature become more obvious through a division of labor and the establishment of property.

Rousseau then says that those with property (i.e. the rich) devised a scheme of protecting their property by deceiving others into thinking that it was for everyone's good to have laws. These laws became the basis of society, destroyed natural liberty, and subjected the whole human race to labor, servitude, and misery.

Rousseau concludes with an argument about inequality - moral inequality (i.e. inequality founded upon laws) that does not result from physical inequality found in nature is contrary to the law of nature. In other words, Rousseau believes it is not right for a few persons to be abundantly wealthy while multitudes lack bare necessities. In part 4c, Rousseau will describe a new kind of social contract designed to address these issues.

What are Public-Private Partnerships?

Public-Private Partnerships are sometimes referred to as PPPs or P3s. E.R. Yescombe (Public-Private Partnerships: Principles of Policy and Finance, p.3) describes project-based or contract-based PPPs as having the following elements:

1. a long-term contract between public and private entities,
2. for the design, construction, financing, and operation of public infrastructure by the private sector,
3. with payments over the life of the contract made by either the public sector party or by the general public as users of the facility, and
4. with the facility remaining in public sector ownership (or reverting to the public sector at the end of the contract).

But I am interested in a slightly different version of P3s, though perhaps applied to the same types of issues:

1. an entity created with two types of "owners", one that is profit-motivated (i.e. private sector) and one that is mission-motivated and controlled through a political process (i.e. generally public sector),
2. by "owners", I mean that the entities have a claim to the assets of the entity (i.e. "owners" can provide debt, equity, or various hybrids financial sources), and
3. the mixed "owner" arrangement is often evidenced through Board structure, staffing, etc.

In this sense, I am talking about true legal partnerships, not just contractual arrangements between parties with differing motives. A good example of this was Fannie Mae and Freddie Mac where they had private common stock owners, but their Board was composed of 18 members, 5 of which were appointed by the President of the United States. Further, while the entity had common stockholders, it also had access to implicit and explicit forms of borrowing from the U.S. Treasury.

Economists describe this mix of motives as having mixed or dual "objective functions." For example, profit-motivated companies have an objective function to maximize profits (i.e. revenues less expenses), subject to the production function (i.e. the combination of labor and capital that produces output). Public, or non-profit, entities have an objective function to maximize quality or quantity, subject to the constraint of resources. Obviously, when both motives are combined into the same entity, there is opportunity for both conflict and synergy.

Furthermore, the role played by each type of entity is evidenced by the type of capital they provide (i.e. debt or equity). In this sense, a theory of P3s can use some of the same tools as used by Modigliani and Miller's (M&M) theory of capital structure. It is this combination (i.e. entities with mixed motives plus capital structure theory) that intrigues me about P3s and offers an opportunity to create a new theory of P3 capital structure and how it can be used to result in more effective partnerships.

More to follow...

The "Natural" Right to Housing (Part 3): Locke

(this post is in draft form, it is going to take a lot more work and my head hurts)
The next stop in considering a natural right to housing is John Locke, author of Two Treatises of Government. This book, written at the end of the 17th Century, provided a foundation for private property rights and challenged the concept of monarchies.

Locke describes a State of Nature that has the following properties:

1. all persons are free to behave and use their possessions as they see fit
2. all persons are equal with no one having more power than another
3. the State of Nature is governed by the "law of nature", or reason
4. no person should harm another person's life, health, liberty, or possessions
5. all persons have the power of execution of all laws and of using reason and no person can appeal to a judge or arbitrator

Locke sees three weaknesses in the State of Nature:

1. lack of settled law (i.e. common consent to right and wrong)
2. lack of an indifferent judge of law
3. lack of a power to execute and enforce the law

Similar to Hobbes, Locke expressed a "fundamental law of nature" regarding self-preservation. This Fundamental Law of Nature comes about when a State of War exists such that one person tries to subject another to his/her will. Society is formed when people, desiring to avoid the State of War, are willing to quit the State of Nature and join into community for the mutual preservation of their lives, liberties, and estates (i.e. property). Even though people may consent to be governed by the majority in community, no person gives up (or can give up) the Fundamental Law of Nature (i.e. the preservation of mankind).

Similar to Hobbes, Locke believes that people have a right to property that they apply their labor to and can use (i.e. property necessary to preserve and enrich one's own life). By use, Locke means "not wasted or perishing unused" so that "used for trading something else that is then used" is reasonable and within the right of property. In fact, the combination of natural resources and labor is the basis of Locke's definition of property. Locke sees all mankind as benefiting from this type of property because the application of man's labor increases the common stock of all mankind.

In this way, Locke defines and confines property to things that are "not wasted" as opposed to things that are traded or stored up (e.g. the use of money as a holder of value from one time period to the next). When people increase, and introduce money as a store of value, land becomes scarce. And so, communities settle the boundaries of their territories and use law to regulate private property among their members.

What then would Locke say of our current situation where some have 20,000 square foot houses, some have 2,000 square foot houses, and some have none at all? Locke's ideas about property were bounded by a combination of "use" (meaning not wasted) and "labor" (meaning effort on the part of people). In this sense, I believe Locke would have found that a society containing unused houses (or portions of houses) to be a violation of the State of Nature, but that no person by right deserves to be housed if they do not apply their own effort to being so.

Next stop, Rousseau...

The (Natural) Right to Housing (part 2): Leviathan

Any conversation about natural rights has to consider a basic text of political science, the Leviathan by Thomas Hobbes. For those that have been out of school for a while, the Leviathan was published in 1651 and is an essay (a long essay) regarding how and why governments are formed.

Here's a quick summary of what I find in Leviathan that is applicable to this question of whether there is a natural right to housing. Hobbes line of logic is:

1. All persons are born equal in nature.

2. Without government, life is solitary, poor, nasty, brutish, and short (this is one of Hobbes's famous quotes). Everyone is at war with everyone.

3. The "laws" of nature are what men agree to as articles of peace due to a fear of death from war. Laws determine and bind persons from action.

4. The "rights" of nature are that each person has the liberty to pursue self-preservation (liberty being the absence of external impediments). Rights are the liberty to do or forbear doing some thing.

5. Some rights are inalienable under any circumstance, such as self-defense against force.

6. The sum of the laws of nature are "do not unto others that which you would not do to yourself." This is an interesting twist on the Golden Rule to "do unto others as you would do have them do unto you." It reflects Hobbes's emphasis on liberty (i.e. the right to act or not act).

So, where does that lead us regarding a right to housing? The following reflects one way to interpret Hobbes with regard to this subject:

1. Self-preservation is a right of nature, fundamental, inalienable, and common to all persons.

2. Among the physical things needed for self-preservation are food and shelter, at least at subsistence levels. Without laws to the contrary, persons would create subsistence shelter on their own (or they would perish in many climates).

3. The ability to shelter ourselves is not possible unless the titling of land into ownership by law incorporates a way to ensure all persons hold title to some land suitable for human habitation (e.g. a common area available to all).

4. Further, zoning ordinances and building codes prohibit the creation of some forms of shelter that would be suitable at a subsistence level, thereby reducing some persons to the absence of shelter.

5. Because the right to self-preservation in alienable, no law that prohibits the provision of subsistence shelter without providing an equivalent alternative is unjust.

6. To do otherwise violates Hobbes's sum of the law of nature.

Hobbes's political philosophy leads me to conclude he would be in favor of a right to housing. However, Hobbes's most well known quotation (i.e. "life is solitary, poor, nasty, brutish, and short") and his belief that persons are naturally at war with one another unless they form a government bound by laws suggest that even our worst prisons or shelters would probably look luxurious to Hobbes. After all, the right to self-preservation is not a right to equality and would more likely reflect bare subsistence at best (i.e. that which people would create in nature if otherwise unobstructed by laws).

Next stop, John Locke's Two Treatises of Government...

Letter to the Editor of CFA Magazine

Below is the text of a "Letter to the Editor" of CFA Magazine that I submitted in response to a recent article regarding the role of regulation in the current financial crises.

Raymond Niles's Point/Counterpoint in the Jan-Feb 2009 issue of CFA Institute Magazine misleads readers about the Community Reinvestment Act (CRA). He claims that regulation caused the financial crisis, which is an appropriate expression of opinion given that it was an opinion piece. However, his claim that the CRA is a regulation that caused the financial crisis, that CRA was a principal factor in the housing bubble and related collapse, and that CRA is an example of government's repeated violation of our individual rights is not supported by evidence within his article and runs counter to evidence presented elsewhere.

CRA legislation was passed in the 1970s to ensure that entities using federal insurance to gain deposits subsequently made loans in those neighborhoods where deposits were obtained. CRA is not new, it was not implemented just prior to or concurrent with subprime lending and the financial crises. There are also specific studies that challenge his argument:

1. Regarding the financial crisis and CRA's role, an analysis conducted by Federal Reserve staff in November 2008 indicates that "only 6 percent of all higher-priced loans in 2006 were made by CRA-covered institutions or their affiliates to lower income borrowers or neighborhoods in their [CRA] assessment area" (see Glenn Canner and Neil Bhutta (2008). "Staff Analysis of the Relationship Between the CRA and the Subprime Crises" at http://www.federalreserve.gov/newsevents/speech/20081203_analysis.pdf).

2. Regarding CRA's role in the housing bubble and related collapse, two studies found no conclusive evidence that CRA-related loans are more likely to have performance issues than comparable non-CRA-related loans (see Glenn Canner and Neil Bhutta (2008). "Staff Analysis of the Relationship Between the CRA and the Subprime Crises" at http://www.federalreserve.gov/newsevents/speech/20081203_analysis.pdf and see Elizabeth Laderman and Carolina Reid (2009). “CRA Lending During the Subprime Meltdown,” Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, pp. 115-133).

3. CRA was not forced upon anyone; the choice was simple, any entity that felt the bargain was unfair could choose not to be federally insured (i.e. not be a bank). In fact, many lenders made such a choice. An analysis of the 2006 Home Mortgage Disclosure Act (HMDA) data indicates that roughly a third of applications were taken by independent mortgage companies rather than depository financial institutions or their affiliates (see Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner (2007). "The 2006 HMDA Data," Federal Reserve Bulletin, vol. 93 at http://www.federalreserve.gov/pubs/bulletin/2007/articles/hmda/default.htm).

One thing I can agree with Niles about is that we have to understand root causes of the current situation before developing appropriate responses or else we are doomed to repeat our mistakes. Towards that end, our assessment of root causes must be based on available evidence and not just ideological opinion.

The Right to Housing (part 1)

There's a topic that has been bothering me recently as I considered the 2009 Taylor Symposium topic - the American Promise and housing - namely, is there a "right to housing"? That issue is/was too broad for the limited time available at the Symposium so I am going to try to work through that issue in a couple of posts, of which this is the first (don't be surprised if you come back and I've revised/edited as it is a thought-in-process).

Let's start with what is meant by "right(s)". Have you ever looked the word up in the dictionary? Lot's of entries. I am not a political scientist and will probably violate a dozen issues in that field, but I find a discussion of rights can generally broken down into three types:

1. Natural rights that are absolute, common to all persons, and inalienable except when taken by unjust force. An example of such rights in the Declaration of Independence are the rights to life, liberty, and the pursuit of happiness. Violations of these rights are often enforced through criminal law.

2. Social or civil rights that are provided through law, enforced by the community as a whole (often through a police and/or judicial process if necessary), and are transferable through contract. By "civil", I mean "established by law" as opposed to the more common "Civil Rights Act of 1964" as used in the United States. An example of such rights are the bundle of rights included in fee simple title to real estate. Violation of these rights are commonly litigated through civil law. Natural rights are sometimes embodied into social rights by law as well.

3. Economic rights that are relative and evolving over time. Examples of these rights are policies/programs known as "entitlements" (e.g. social security payments that are available to all persons who are disabled, meet certain age requirements, etc.). Economic rights are always(?) embodied into social rights by law as well. The term "economic rights" is sometimes used to describe what I've defined as natural rights above.

For the purposes of these posts, I mean the following (Webster's Ninth New Collegiate Dictionary) by "right":

"...something to which one has a just claim...the power or privilege to which one is justly entitled..."

Clearly, the concept of "just" (i.e. "...acting or being in conformity with what is morally upright or good...") is closely tied to this definition of rights. And, from the three types of rights noted above, it is most closely tied to natural rights.

In short, is there a natural right to housing? Dust off the college textbooks boys and girls, this will be a trip back to the basics of western civilization, more to come...

CRA v2

o.k., I have to admit it, I began feeling bad this week that maybe my last post re: CRA in Indianapolis was a little harsh. In that post I compared what percentage of mortgage loans in the Indianapolis MSA were made by banks vs. what percentage of deposits they held. The more I thought about it, the more I realized that a lot of of the mortgage market is made up of non-deposit lenders (in this case for 2007, over 60 percent of the market was made of lenders other than those listed as the top deposit institutions) that I should take a second look. The chart below shows a revised calculation that looks solely at the mortgage loans made within the existing group of deposit institutions compared to the percentage of deposits made by those lenders. A couple of noticeable differences (yeah 5/3rd!!), too much of the same...

CRA Info

If you are interested in learning more about the Community Reinvestment Act, see the following links:


http://www.frbsf.org/publications/community/cra/revisiting_cra.pdf

http://www.federalreserve.gov/newsevents/speech/duke20090224

2007 Indianapolis MSA Lending Data

Cut/paste the link below to connect to a spreadsheet that summarizes mortgage lending in the Indianapolis Metropolitan Statistical Area (i.e. Boone, Brown, Hancock, Hamilton, Hendricks, Johnson, Marion, Morgan, Putnam, and Shelby Counties).


http://spreadsheets.google.com/ccc?key=p6zfId0QFa9Dlx-IdoRqnew&hl=en#

Housing Affordability and Stability Plan

[The text below was adapted from a speech I gave recently at the 2009 Taylor Symposium at IUPUI regarding the American Promise and its relation to housing]

I would be remiss not to touch on the issue of foreclosures and the recent Housing Affordability and Stability Plan. This program poses two questions, which strike me as close to the mark but not quite on target: 1) can refi requirements be modified in situations where the mortgage balance is higher than the value of the home to allow the borrower to qualify for lower interest rates and 2) is the mortgage payment affordable relative to the borrower's income?

Here are a list of questions that I think lead to a better outcome:

1. if the borrower walks away, what is the lender's next best choice of action? What is the financial result to the lender? If this number is below the mortgage value, then you have an estimate of what a rationale lender should be willing to forgive on the debt. Borrowers have put themselves at risk for the original equity in the home, but once that is gone, it is the lender that bears the cost of further declines in value below the mortgage amount.

2. does the borrower have housing alternatives (e.g. tax credit rental housing limits) and if so what are their costs? This tells you whether or not the borrower has an incentive to walk away (i.e. as opposed to whether the mortgage exceeds the value or the payment vs. income). If the answer is that the borrower's other housing options are more expensive, then the borrower will stay regardless of the share of their income spent on housing. If the answer is that the borrower has other less expensive options, then the borrower has to decide whether to pay the "premium" for their existing arrangement.

So let's walk through a couple of examples:

1. the purchase price is $50,000, the borrower gets a loan for $40,000, the value is now $35,000, and equivalent tax credit rental rates with available units are about $500. Result: the borrower has already lost their $10,000, the lender could take a write down of $5,000, and the resulting mortgage payment would be about $360 (30 year fixed rate at 6% plus about $150 for taxes and insurance). Alternatively, the lender could take no write down and the resulting payment would be $390. So, now we have the negotiating scenario that should be worked out between borrowers and lenders with no governmental involvement (i.e. a mortgage between $35,000 and $40,000 with a resulting payment between $360 and $390, both of which are cheaper than the alternative of $500).

2. the purchase price is $50,000, the borrower gets a loan for $45,000, the value is now $45,000, and the equivalent tax credit rental rates with available units are about $500. Result: the borrower has lost $5,000 but stays in the home, the lender is at risk for nothing, and the resulting payment is $390. No negotiation is necessary and no government involvement is necessary.

Now, you can probably already see that these results are driven in large part by available rental rates that I've assumed. So, let's change this part and say the available rental rate is $350 just to make it interesting.

1. going back to the same scenario #1 as above, the lender has a big incentive to take a substantial writedown because if they don't, the borrower can walk away and find an equivalent unit.

2. going back to the same scenario #2 as above, the lender has no incentive to walk away (i.e. they can sell the home for more than the mortgage), but the borrower has a choice to make - stay in the home and pay more than the alternative or walk away and rent the apartment.

Push it a step further, make the available rental rate $300 (now we are getting extreme but perhaps possible in very distressed housing markets). In this case, the lender consistently has an incentive to write down the debt to the current value. And, the borrower bears the responsibility of paying the premium (i.e. the reset mortgage payment versus the available rental rate) if they choose to stay in the house.

One argument against this approach is that it relies on having available rental units. Yep, it does. And if those units aren't available? The price of rental housing goes up, changing the dynamics for any given scenario noted above but still coming to similar resolutions (i.e. just at higher rental rates for alternative housing choices).

To make this type of policy effective, several issues must be addressed:

1. liability protection for servicers to negotiate as noted above. While the case studies are clean examples, real life is less clean. Servicers need to know that if they follow appropriate guidelines, make decisions in good faith, and apply good judgment, they will not be sued.

2. elimination of debt forgiveness tax for borrowers

3. continued support for the secondary mortgage market (e.g. Fannie, Freddie, and the FHLB) so that credit isn't restricted due to lack of liquidity as long as the loans are safe, sound, etc. For existing loans, if the borrower has maintained their housing payment, other sources of credit default (e.g. credit cards, car payments, etc.) should be given little weight in the analysis as the refinanced loan is no more at risk from of borrower default than the current loan (and in some cases as noted above, less at risk).

4. greater transparency of prices and choices, for both borrower and lenders.

Who gains and loses from this scenario? Lenders may gain or lose, but at least the losses they are taking are voluntary or negotiated reductions and not cramdowns. Borrowers may gain or lose as well as the outcomes are a result largely of their choices and willingness to pay the premium differences for particular choices/outcomes. Taxpayers win because these are resolutions that are largely free of taxpayer funding. And, long-term all potential homeowners win because the validity of mortgage law is maintained and continues to be a desireable lending vehicle for capital markets.

The Economics of Homelessness

[The text below was adapted from a speech I gave recently at the 2009 Taylor Symposium at IUPUI regarding the American Promise and its relation to housing]

Tremendous strides have been made to address homelessness over the last decade, but I fear the next few years will remind us of just how weak the economic safety net has become. The strain of homelessness we are about to witness is not the kind driven by antisocial behaviors; rather, the current financial environment will once again bring back the kind of homelessness driven primarily by economics.

Homelessness has traditionally been considered a sociological or behavioral phenomenon, not an economic one. But economics has much to teach us about homelessness. The fact is that housing is not one of those consumer goods with a nice smooth supply graph. Rather, for various reasons including property taxation, building codes, and zoning, not to mention NIMBYism, housing's supply curve gets cut short at the lower end of the supply function meaning that once a household desires just a little less housing than the socially acceptable lowest cost private sector alternative they suddenly risk slipping a long way down the supply curve - we refer to this as the at-risk population.

For example, imagine if housing were like rice or wheat, where I could buy a kernel, a pound, a bushel, a grain silo, a field, or a farm, all depending on how much I wanted to consume? Housing, when viewed from a quality perspective, used to be more like wheat - the private sector provided supply at the bottom end of the curve such as lower rent apartments, boarding rooms, single room occupancy hotels, cage hotels, dormitory style hotels, flop houses, or even a rope strung up in the barroom. But over time, we have lost all of those lower priced private sector options, some for good reasons and some not, such that now you can rent a modest apartment, but once you slip below that level the next step is doubling up, Section 8, or living in a charitable shelter. In the current economic environment, as households slip lower on the income and consumption scale, we are going to see a rise in the number of folks that loose a grip on that last ledge of housing choices, particularly families, falling not just to the next lowest level on the supply curve but all the way into homelessness.

In the next decade, we must look for ways to fill in that supply curve and economics offers a tool for assessing how to do that effectively. Solutions will and should require the best of our abilities in creating public/private partnerships to be successful.

The Community Reinvestment Act (CRA)

[The text below was adapted from a speech I gave recently at the 2009 Taylor Symposium at IUPUI regarding the American Promise and its relation to housing]

Another area for enhancing housing opportunities in the next decade is the Community Reinvestment Act, more commonly referred to as CRA. This federal legislation was first passed in the 1970s, revised and changed in subsequent decades, and will likely be revised again over the next year. CRA requires that banks that receive federal deposit insurance must make loans in the geographic areas from which they receive those deposits. It's pretty simple, if you want a taxpayer guarantee so you can obtain some of the cheapest funds available through bank deposits, then you have to put your money to work in the communities from which you take it.

Recently, as subprime lending has become less popular and the list of failed financial institutions grows there has been much screaming and yelling about CRA being the cause of the subprime crises. The claim is that CRA forced lenders to make loans to borrowers that otherwise were not qualified, this weakened the banks' financial position, and therefore CRA was the underlying cause of the current crises. I heard this argument as recently as this last weekend from Monica Crowley on the McLaughlin Group on PBS. The Federal Reserve has obviously heard this criticism as well, has devoted significant staff time and research to the issue, and has felt a growing need to speak out about it as recently as this week. Here's what Federal Reserve Governor Duke had to say about the subject earlier this week:

"... our recent analysis of CRA-related lending found no connection between CRA and the subprime mortgage problems. In fact, the Board's analysis found that nearly 60 percent of higher-priced loans went to middle or higher-income borrowers or neighborhoods, which are not the focus of CRA activity. Additionally, about 20 percent of the higher priced loans that were extended in low or moderate-income areas, or to low or moderate-income borrowers, were loans originated by lenders not covered by the CRA. Our analysis found, in fact, that only 6 percent of all higher-priced loans were made by CRA-covered lenders to borrowers and neighborhoods targeted by the CRA. Further, our review of loan performance found that rates of serious mortgage delinquency are high in all neighborhood groups, not just in lower-income areas...an analysis of foreclosure rates...found that loans originated by CRA-covered lenders {in that particular study} were significantly less likely to be in foreclosure than those originated by independent companies. Clearly, claims that CRA caused the subprime crisis are not supported by the facts."

The slide below provides a different type of measurement that addresses the same issue as CRA - namely, do lenders make loans in proportion to the places where they get deposits? This slide compares the percentage of deposits held by approximately 40 institutions to the percentage of applications taken by those institutions for home purchases, all as of 2007, in the Indianapolis metropolitan area. This calculation is not perfect, there are several painful and intricate adjustments that are used to get to this dataset, and lending institutions can and do provide more than just mortgage loans to the community to support their CRA activities. But it is clear, some institutions are taking more in deposits than they are providing in mortgages and we need legislation like the CRA to make sure taxpayers receive a proportionate benefit for the deposit insurance they provide.

Admittedly, CRA needs to be updated in the coming decade - but it needs to be made stronger, not weaker. For example, in 2008, 31 institutions were reviewed for CRA in Indiana, only 1 was noted as needing to improve its performance. I know of hardly anything worth measuring where a sample size of 31 would suggest everything is just as expected in all cases but 1. I have four suggestions for changing CRA:

1.Provide greater transparency of what geographic areas and customers qualify for CRA activities and how banks' evaluation results are determined. Most loan officers have no idea how their bank achieved its CRA evaluation, and their depositors know even less.

2.Make evaluations based on customers, both borrowers and depositors, rather than just deposit dollars. For example, a foreign deposit placed in a bank in South Dakota should not create a CRA obligation for the bank. But likewise, a bank that solicits for credit cards and mortgage loans in a given neighborhood should have some responsibility to be involved in that neighborhood's civic activities beyond just lending.

3.Use a relative measure of peer-based assessments rather than absolute benchmarks. It is not right that evaluations be so lop sided such as having 30 of 31 institutions needing no improvement. Bell curves are good for students at IUPUI, they are also good for banks, and can introduce a measure of market forces into the process.

4.Extend the CRA to all entities requiring government capital infusions and/or loan guarantees. This includes airlines, insurance companies, and yes, even car companies. If you take the money, you have to take the responsibility of investing in local communities.

Race and Housing

[The text below was adapted from a speech I gave recently at the 2009 Taylor Symposium at IUPUI regarding the American Promise and its relation to housing]

Attorney General Eric Holder was right to bring discussions about race to the forefront last week during Black History Month, even if he was wrong about us being a nation of cowards. I don't think it is cowardice that keeps us from discussing race, it would be nice if it were because then like the lion in The Wizard of Oz we could just recognize that we are not cowards and all would be well. Rather, I think it is comfort, or comfortableness, that keeps us from discussing race - it is easier for everyone to just not talk about race or to just talk about it with others like themselves, so that no one is offended and no one offends, with the result being an uneasy silence that reflects tension, not peace. For those linguists in the room, that behavior is better described as sloth, not cowardice, and in case you've forgotten sloth is one of the seven deadly sins.

There are many ways to measure racial and economic segregation. This slide provides one such measure, the Dissimilarity Index - this Index measure what % of the minority community would need to reside in a different census tract in order to have a random distribution of both majority and minority households. There are several other measures of segregation that are often used as well, I've chosen the Dissimilarity Index because it is one of the more commonly used measures and is readily understood. As you can see from this slide, the good news is that segregation in the Indianapolis metropolitan area improved from 1990 to 2000. Compared to other cities in the United States, Indianapolis ranked 13th in 2000 based on the Dissimilarity Index and ranked better than other Midwestern cities such as Detroit, Chicago, Cleveland, Milwaukee, Cincinnati, and St. Louis. Further, Indianapolis also improved by the same measure when considering income alone or income and race combined.

But more recently, 2008 marked the 10th anniversary of the agreement entered into by the United States, the State of Indiana, and the various school districts located within Marion County to end school busing in Indianapolis. You may ask what school busing has to do with housing? In this case, a lot. The agreement to end busing did so with a supplemental agreement to shift the emphasis from desegregated schools to desegregated housing. Now, if you think desegregating schools is difficult, pack a lunch and get ready for a fight when you decide instead to desegregate housing.

Don't misunderstand. I realize that busing is a deeply controversial issue that has proponents and opponents on both sides, of all races and ethnicities, of all political stripes. I am not arguing for or against busing, it was what it was for both better and worse. And, I am not here to criticize past efforts or policies in this area or the entities involved. But I will adamantly argue that the scope of our policies regarding housing desegregation has been limited compared to the power of busing and have likely led to fewer opportunities for low income minorities that want to participate in suburban housing and educational options.

In this coming decade busing will officially end as the remainder of the phase out period passes. We must decide if our children, let alone ourselves, are better or worse off to live in racially, ethnically, and economically integrated neighborhoods? I think the answer is we are better off to do so, both because it promotes great understanding of each other and because it makes for an entire metropolitan area that is more economically sustainable. It is time to have this conversation before another decade passes and the Taylor Symposium is a good place to start.

Are We a City or a Region?

[The text below was adapted from a speech I gave recently at the 2009 Taylor Symposium at IUPUI regarding the American Promise and its relation to housing]

Are we a City or a Region? The chart below shows that at the turn of the Twentieth Century, the counties surrounding Marion County had a population roughly equal to Marion County. But, as the region expanded, Marion County grew much faster and became an ever increasing share of the overall metropolitan area until roughly the 1950s. It has declined as a share of the total ever since. Building permit data through 2007 suggests that these percentage shares will likely stabilize in the 2010 census at roughly 55% of the total in Marion County and 45% in the surrounding counties. The good news is that there are no weak links in this data (i.e. no counties losing population). All of the counties show growth, all have something to add to the whole.

What does that mean for housing policy? Many civic initiatives other than housing recognize the story told by the figure below - while Indianapolis is still the center and focus of the Region, it is operating inside a larger metropolitan area. Other civic initiatives understand and function as though they operate within a region, not a city. For example, United Way is the United Way of Central Indiana. For businesses, it is the Central Indiana Corporate Partnership. Even Realtors recognize that it is the Metropolitan Indianapolis Board of Realtors. But look at our housing-related institutions, especially those that foster opportunities for low income and/or minority households (i.e. the Indianapolis Housing Agency, the Indianapolis Neighborhood Housing Partnership and community development corporations, and the City's Abandoned Housing Initiative)- they are all focused on the traditional boundaries of the City.

In some ways, this city-centric focus is driven by how federal funds are allocated to specific municipalities. But in part, it is driven by the lack of an entity with a metropolitan focus that is seen as an honest broker to provide research, bring together decision makers for policy discussion, and show how housing related decisions in specific communities affect the metropolitan area as a whole. When households make housing related decisions, they typically do so in the context of the metropolitan area. For example, do I want to live in the north side or the south side? If on the west side, do I want to live close in, near I-465, or further out in Avon, Plainfield, or some more distant interstate exit.

If we are to truly foster housing opportunities in the coming decade, we must think about housing the same way households do - in the context of the metropolitan area, not just the city, and we need a non-partisan entity or institution (existing or newly formed) that can provide that kind of big picture overview of the metropolitan housing market through research, civic engagement, and policy making.

A Short History of Housing and Community Development in Indianapolis

[The text below was adapted from a speech I gave recently at the 2009 Taylor Symposium at IUPUI regarding the American Promise and its relation to housing]

Most decades over the last century contained significant housing and community development milestones for Indianapolis. In general, what we can see from this short history is a community that is bigger than just a city, that has a history (both good and bad) of racial issues tied to housing, that recognizes the importance of civic engagement with the private sector, and that has worked aggressively to find solutions to housing market failure:

•Flanner House was started in 1889 to help minorities migrate from the South to the North

•In the 1920s, zoning ordinances were established, including residential segregation ordinances restricting minorities from moving into all-white neighborhoods. The National Association of Real Estate Boards emphasized homogeneous neighborhoods and restrictive covenants that limited housing choice and opportunity.

•In the 1930s, a state housing law was passed that allowed the establishment of local housing authorities. Further, Lockerbie Gardens, a federal public housing project under the WPA and located just a block or two from here, was started in 1935 and finished in 1937 with 748 units created predominantly for minorities.

•In the 1940s, Flanner House created a self-help housing program utilizing a sweat equity concept and the Indianapolis Housing Authority was created in 1947. In the 1950s, the city council voted to prohibit federal money for public housing, effectively shutting down the creation of public housing units in Indianapolis.

•In the 1950s, the concept of suburban shopping malls and strip centers began to catch hold as a type of real estate. The 1950s also saw the first steps towards a significant expansion of the interstate highway system that ran through the 1970s.

•The 1970s saw the formation of Uni-Gov, a controversial measure that expanded the boundaries of the City to match the boundaries of the County among other things. Indianapolis also took on the mantle of Amateur Sports Capital, an issue that was integral to the formation and expansion of the IUPUI campus.

•The latter part of the 1970s began civic efforts to revitalize downtown. This included government, entertainment, commercial, and residential investments.

•The latter part of the 1980s and beginning of the 1990s saw the establishment of a Mayoral Housing Taskforce that led to the creation of a "community development" framework including the Indianapolis Neighborhood Housing Partnership and roughly a dozen community development corporations tied to specific neighborhoods within the traditional city boundaries in Center Township.

•The 1990s recognized the rise of homelessness as an urban issue and led to the creation of the Coalition for Homelessness Intervention and Prevention on whose Board I serve. This effort expanded significantly at the turn of the current century with the establishment of the 10-year Blueprint to End Homelessness and the creation of a local housing trust fund.

•The last decade also saw initiatives to address abandoned housing and of course we are now in the middle of a foreclosure tsunami that threatens the concept of home ownership as a goal for policy makers.

•Most recently, we are seeing significant federal funds for all types of purposes, but for the first time in a long time we are seeing one of those purposes being housing, including foreclosure mitigation, public works, and other community development initiatives.

Redistribution Policies and Economic Growth

This post is a little off the beaten path for me, but I heard a presentation today that bugged me so I decided to dig a little deeper. Scott Hodge of the Tax Foundation spoke at the Economics Club of Indiana luncheon re: taxes, equality and the future of America . He popped up a chart of two "societies", one of which had a comparatively even distribution of wealth and one of which had a more skewed distribution. He polled the audience to ask which society they would rather live in and revealed that the even distribution society was Romania in the 1950s and the skewed society was the Forbes 400 list.

He then concluded that more even distributions mean that everyone will be equal but poor, but skewed distributions show societies that reward risk taking and provide economic growth. Now, I've never been a flat-taxer, and while I don't like paying taxes I do favor progressive taxation. But I'll throw all of those ideas out the window if it means a better quality of life. So, his claim got my attention - are redistributive policies and/or societies correlated with a lower quality of life as measured by income or economic activity?

Below is a quick chart taken from the CIA's World Factbook that shows the GINI Coefficient (i.e. a measurement of income distribution) against per capita Gross Domestic Product. Hmm? Clearly, there are some societies at the extremes (i.e. high per capita GDP with a low GINI Coefficient and vice versa). But what about those societies that get some of both (e.g. the United States has a per capita GDP of about $48,000 and a GINI Coefficent of about 45, Hong King and Singapore are the two dots just above the U.S.)? The correlation between per capita GDP and the GINI Coefficient is -.42. Interesting info, but clearly a society can have a) very little per capita GDP and both a high and a low GINI Coefficient and b) relatively high per capita GDP such as the United States and a moderate GINI Coefficient. It reminds me of the mantra in my econ stat class - don't confuse correlation with cause/effect.

The "New" Great Divide

Ever seen a Great Divide? (http://en.wikipedia.org/wiki/Continental_Divide)

In real estate, there is a lot of talk about a Great Divide that exists between buyers and sellers these days. Also referred to as the bid/ask spread, we are in a situation where buyers have one set of demands and sellers have a different set of expectations, often the two do not meet. But, given time and a hard push off the plank by lenders, this disconnect will resolve itself.

There is a very different Great Divide occurring in commercial real estate that is generally unrecognized - that between investors and lenders. Lenders want exceptionally safe deals, low loan to values, high rate spreads, built-in floors, etc. Investors want the deals with lots of distress, big potential for upside and growth, some current income, etc. Find a deal that looks like those two descriptions simultaneously and you have a pot of gold at the end of the rainbow.

This is the big secret that is underlying the current freeze occurring in commercial real estate markets - it isn't just that buyers and sellers can't agree, it is is that lenders and investors are at odds. Great Divides are difficult places, they are hard to cross and unforgiving. The good news is that the commercial real estate market will unthaw much sooner than a Great Divide will level out, the bad news is that neither is likely to occur soon.

Community Reinvestment Act

The Community Reinvestment Act (CRA) is a driving force in the housing and community development field. For more info/background on CRA, see www.ffiec.gov.

Once the economic stimulus bill is passed, CRA is expected to come back to the forefront of the legislative agenda in the House. In part this is because it is important to housing and community development investment, in part it is because the banks want it changed, in part it is because the federal government now has a financial stake in institutions through more than just deposit insurance, in part it is because Rep. Barney Frank chairs the House Financial Services Committee, etc.

Here are 4 suggestions for regulatory change to make the program better:

1. greater transparancy of what geographic areas/customers qualify for CRA activities, how banks are evaluated, etc. Talk to most loan officers and they have no idea how/why/where their bank is evaluated, let alone members of the community. If loan officers don't know, it is a given that most members of the community don't understand it either. With today's technology, there is no reason this type of information can't be provided on-line using maps, images, charts, etc.

2. evaluations based on customer (i.e. both depositors and borrowers) addresses rather than based on deposit dollars. As it is, deposits can be skewed by all types of things but the current subprime debacle shows us that both the deposit base and the customer base matter to a bank's involvement in communities.

3. use some sort of peer-based relative measure of performance for ratings/evaluations rather than an absolute measure. This change will introduce market forces and competition to the process.

4. consider the requirements that should come with federal aid and whether CRA should be expanded to other consumer-oriented companies that use financial assistance. Taxpayer money isn't without strings - to avoid a free-for-all, takers should feel as though they are facing either the gallows or the taxpayer's requirements with the gallows looking like a viable choice.

The Future of the GSEs

Paulson recently spoke on the subject of his actions regarding GSEs and the his recommendations for their future. Given that he covered two of my favorite subjects (housing and P3s), it got my attention.

Paulson makes 3 broad claims in this article that I disagree with, one of which is worth emphasizing:

1) it is the GSEs' mixed-incentive structure that allowed them to become so big. This is an odd place for Paulson to stake his claim given that he turned the TARP into a mixed-incentive structure...

2) the GSEs can help the economy return to normalcy by keeping mortgage rates low and by mitigating foreclosures. Artifically low rates were part of what got us where we are, but addicts will be addicts...

3) the question re: the GSEs' future is how much we want the government to reduce mortgage interest rates by taking on mortgage credit risks. It is this issue (i.e. the role of GSEs in housing policy) that I want to address.

Yes, one way GSEs can affect housing policy is by taking on mortgage credit risk. Whether or not this credit risk is appropriately priced and/or the benefits of government-sponsored funding are passed through to borrowers is a question that has been long debated. Yes, it is important to ask whether the private sector couldn't address most issues of credit risk adequately without GSEs. But no, I don't think credit risk is the only, or even primary, role for the GSEs.

The GSEs' primary role is actually contained in Paulson's reference to covered bonds as a potential solution to the current situation. Without government involvement, most mortgage rates and mortgage terms would be variable (rather than fixed) and short-term (less than 30 years). Why? Because this would match the rate and term obtained on funds used by financial institutions and mortgage market participants to create mortgages.

Are variable rates and short maturities good public policy? For households that can bear financial risk, those kinds of terms are fine and perhaps even preferable. But for households on fixed incomes, limited incomes, or purchasing their first home and needing stability in their housing cost, short-term variable rate debt can be deadly. And it is here, in the world of creating more long-term fixed rate mortgages than would otherwise be generated by the market, that GSEs and housing policy can come together.

It is generally misunderstood that GSEs borrow on variable rates with relatively short maturities and use it to fund fixed rate long maturity mortgages (they also used it to fund a lot of short-term variable rate mortgages as well but that is a different issue). That's why we all care that debt holders might no longer want to buy GSE debt - if the GSEs financed all debt with rates and terms matching the mortgages that were purchased, no one would care that the demand for GSE debt might decline. But, when the GSE debt has a short maturity that is due and subject today's rates and the mortgage asset has a long maturity at a fixed rate, well, Houston...we have a problem and it looks a lot like the last one (S&Ls in the 1980s).

Why would any entity create a mismatch? Because it generally is financially profitable to do so as long as short-term rates remain relatively low, long-term rates are relatively high, and there is not a liquidity problem with rolling the short-term debt over each period (i.e. the achilles heal in the current environment).

This is the real question for the next administration and financial markets to resolve - does changing who creates and uses mismatched funding (i.e. S&Ls, investment banks, commercial banks, the private sector, or GSEs) make a difference in who carries the risk, how well it is handled, and the impact it has on the market place? I am going to suggest that it possibly does, but in a sort of indirect way. What are long-term rates comprised of: inflation expectations, risk premiums (i.e. stability of returns), overall level of rates, etc. No one entity controls those factors, but who has the most influence on them? Monetary and fiscal policymakers. So, to the extent that mismatched funding is best influenced by monetary and fiscal policymakers, it seems that is also best used by monetary and fiscal policymakers. In other words, why should the GSEs or the government take on mortgage credit risk or issue adjustable rate loans that are less than fully amortizing? The private sector can do that just fine. But, it is also very unlikely the private market will address the power and stability of a fully amortizing 30-year fixed rate loan to the level desired by public policy.

Underneath the surface of Paulson's political argument (i.e. this problem started before I came, I tried to fix it early on, I couldn't get it done because of politics, that's why I took the extraordinary steps that I did) lies the political-economy argument that should be addressed by this Congress and this administration - mismatched funding is a powerful but dangerous game that thrives on imbalances in the financial markets. Understanding that point is critical for determining the best way forward for the future of the GSEs and housing policy.