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.