Rachel G. Bratt Rachel G. Bratt

ProfessorProfessorUrban and Environmental Policy and PlanningUrban and Environmental Policy and Planning

The U.S. Housing Crisis– The U.S. Housing Crisis– 5 Years Later5 Years Later

CHAPACHAPASeptember 25, 2013September 25, 2013

OutlineOutline

I. Twelve (quick) I. Twelve (quick) observations about housingobservations about housing

II. The housing crisis – II. The housing crisis – causes, impacts and six causes, impacts and six comments about responses comments about responses over past 5 yearsover past 5 years

1) It Matters Where People 1) It Matters Where People Live Live

How they feel aboutHow they feel about

themselvesthemselves Safety, health, stabilitySafety, health, stability Access to good schools Access to good schools

and jobsand jobs

2) Links to the Environment2) Links to the Environment

3) Links to the Economy3) Links to the Economy

From From The New York Times The New York Times ““As Housing Goes, So Goes the EconomyAs Housing Goes, So Goes the Economy”” -- --

May 24, 2011May 24, 2011

““Housing has blown a giant smoking hole in Housing has blown a giant smoking hole in the middle of our economy, and the the middle of our economy, and the consequences continue to impede the pace of consequences continue to impede the pace of recovery.recovery.”” -- -- February 24, 2012February 24, 2012

4) Private For-profit Housing 4) Private For-profit Housing Market is Not Able to Meet Market is Not Able to Meet

Low-income NeedsLow-income Needs

5) Rhetoric in Support of Decent 5) Rhetoric in Support of Decent

Housing Housing

Pres. Franklin D. Roosevelt 1944Pres. Franklin D. Roosevelt 1944

““True individual freedom cannot exist without True individual freedom cannot exist without economic security and independence.economic security and independence.””

A Second Bill of Rights would provide A Second Bill of Rights would provide ““the right of the right of

every family to a decent home.every family to a decent home.””

U.N. Declaration of Human U.N. Declaration of Human Rights, 1948Rights, 1948

““Everyone has the right to a standard of Everyone has the right to a standard of living adequate for the health and well-living adequate for the health and well-being of himself and of his family, being of himself and of his family, including food,, including food,, 

clothing,clothing,

housing and housing and

medical care…medical care…””

U.S. Housing Act of 1949U.S. Housing Act of 1949(and reaffirmed by Congress many times since then)(and reaffirmed by Congress many times since then)

““……a decent home and a suitable a decent home and a suitable living environment for every living environment for every American family.American family.””

65 Years After FDR…65 Years After FDR…

President Obama, 2009President Obama, 2009

““it is not acceptable for children it is not acceptable for children

and families to be without a and families to be without a

roof over their heads in a roof over their heads in a

country as wealthy as ours.country as wealthy as ours.””

Catholic Bishops of the U.S.-Catholic Bishops of the U.S.-19751975

““……decent housing decent housing is is a right… a right… shelter is one of the basic rights shelter is one of the basic rights of the human person.of the human person.””

France: A Right to HousingFrance: A Right to Housing

In France, the right to adequate housing is In France, the right to adequate housing is recognized by law as a fundamental right recognized by law as a fundamental right and recognized since 1995 as a and recognized since 1995 as a constitutional objective. Since 2007, the constitutional objective. Since 2007, the right to housing is right to housing is ““justiciablejusticiable”” -- one can -- one can take legal action against a public authority take legal action against a public authority for failing to fulfill  its obligation to provide a for failing to fulfill  its obligation to provide a housing solution.housing solution.

http://www.cetim.ch/en/interventions/293/lack-of-access-to-adequate-housing-in-france

6) Federal Housing 6) Federal Housing Legislation Has Many GoalsLegislation Has Many Goals

Helping the poor is typically only one of Helping the poor is typically only one of many goals of housing programs. many goals of housing programs.

Stimulating the economy, providing jobs, Stimulating the economy, providing jobs, and supporting the banking industry are of and supporting the banking industry are of major concern. major concern.

7) Most U.S. Federal Housing 7) Most U.S. Federal Housing Subsidies: Not Targeted to Subsidies: Not Targeted to

the Poorthe Poor HomeownersHomeowners’’ deduction (2012) = deduction (2012) =

~$68 billion (mortgage interest) ~$68 billion (mortgage interest)

~ 24 billion (property taxes) = $92B~ 24 billion (property taxes) = $92B

Total HUD budgetTotal HUD budget

= ~$45 billion= ~$45 billion

8) A Minimum Wage Job 8) A Minimum Wage Job Cannot Cover Average Rent Cannot Cover Average Rent

Federal minimum wage of $7.25/hour is Federal minimum wage of $7.25/hour is not sufficient in any state for a full-time not sufficient in any state for a full-time worker to be able to afford an average worker to be able to afford an average priced 2-bedroom apartment.priced 2-bedroom apartment.

In Massachusetts, a full-time worker needs In Massachusetts, a full-time worker needs to earn $24.05/hour to afford to earn $24.05/hour to afford

such an apartment ($1,251). such an apartment ($1,251). In MA the minimum wage = $8.00/hour; In MA the minimum wage = $8.00/hour;

3x the minimum hourly wage is needed. 3x the minimum hourly wage is needed.

9) New Subsidized Housing 9) New Subsidized Housing Looks Like Any Other HousingLooks Like Any Other Housing

Wayland, MAWayland, MA

Nonprofit-owned Multifamily Nonprofit-owned Multifamily Affordable Housing Affordable Housing

(Roxbury, MA, Urban Edge Housing Corporation)(Roxbury, MA, Urban Edge Housing Corporation)

Public Housing: Old and NewPublic Housing: Old and New

Old Public Housing: Consistent Old Public Housing: Consistent with 1950-1970s Designwith 1950-1970s Design

10) Property Values and 10) Property Values and Affordable HousingAffordable Housing

Research has found that if housing is Research has found that if housing is well-designed, fits in with the well-designed, fits in with the neighborhood and is managed well, neighborhood and is managed well, there are no negative impacts on there are no negative impacts on

property values of neighboring property values of neighboring homes. homes.

11) Need for Affordable 11) Need for Affordable Housing? Housing?

Disproportionate housing problems facing Disproportionate housing problems facing households of color, single parent households, households of color, single parent households, elderly, and disabled. elderly, and disabled.

Across the U.S., there are about 30 affordable Across the U.S., there are about 30 affordable andand available rental homes for every 100 available rental homes for every 100 extremely low income renter households (those extremely low income renter households (those earning 30% or less of area median income). earning 30% or less of area median income).

This translates into a shortage of about This translates into a shortage of about

6.8 million housing units. 6.8 million housing units.

12) Therefore, a Need for…12) Therefore, a Need for… Multi-faceted housing strategies, targeted to different Multi-faceted housing strategies, targeted to different

market conditionsmarket conditions Supply strategies & demand strategiesSupply strategies & demand strategies Regulatory land use strategiesRegulatory land use strategies Incentives and sticksIncentives and sticks Preservation of the existing affordable housing stockPreservation of the existing affordable housing stock Articulation of federal, state & local goalsArticulation of federal, state & local goals Fair housing; consumer ed.; advocacyFair housing; consumer ed.; advocacy Support for nonprofits... ANDSupport for nonprofits... AND

II. We Need to Prevent II. We Need to Prevent Another Mortgage CrisisAnother Mortgage Crisis

Acknowledge the dislocations to households, Acknowledge the dislocations to households, to neighborhoods, to citiesto neighborhoods, to cities

Understand what happened to create the crisisUnderstand what happened to create the crisis Assess the strategies being pursued to Assess the strategies being pursued to

remedy the immediate problems and to remedy the immediate problems and to prevent further crises: prevent further crises:

too little too late? too little too late? regulatory responses? regulatory responses? new ideas?new ideas?

Causes of Mortgage CrisisCauses of Mortgage Crisis Low interest rates; “cheap” moneyLow interest rates; “cheap” money Hysteria about “buying now”Hysteria about “buying now” Unprepared consumersUnprepared consumers Originators of loans taking little riskOriginators of loans taking little risk New, creative mortgage derivatives that hid New, creative mortgage derivatives that hid

levels of risklevels of risk Rating agencies not neutral partiesRating agencies not neutral parties Confusion about Fannie low income goalsConfusion about Fannie low income goals Lax federal regulatory environmentLax federal regulatory environment

More on deregulation…More on deregulation…

“…“…the genius of the market economy, freed of the distortions the genius of the market economy, freed of the distortions forced by government housing policies and regulations… can forced by government housing policies and regulations… can provide for housing better than Federal programs.” -- provide for housing better than Federal programs.” -- Report of Report of the President’s the President’s Commission on Housing, 1982 (Reagan)Commission on Housing, 1982 (Reagan)

Deregulation of savings & loans Deregulation of savings & loans (Reagan)(Reagan)Repeal of Glass-Steagall, 1999 Repeal of Glass-Steagall, 1999 (Clinton)(Clinton)

and more…and more…

----

Mortgage Crisis ImpactsMortgage Crisis Impacts 2009- 2011 –foreclosure started on ~5.3 million

owner-occupied homes; approx. 7% of owner-occupied homes in the U.S.

Many more delinquent/in default. March 2012-- 2.2 million households, receiving

assistance by a federal program. This includes many who did not successfully

modify their loan or refinance; far fewer than the goal of 7-9 million assisted

homeowners

““Those of us who have looked to the self-interest of Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”(myself especially) are in a state of shocked disbelief.”

-- Alan Greenspan former Chairman, Federal -- Alan Greenspan former Chairman, Federal Reserve Board Reserve Board

Statement made to the U.S. House Oversight Statement made to the U.S. House Oversight Committee, October 23, 2008Committee, October 23, 2008

Dodd-Frank, 2010Dodd-Frank, 2010 No bank should be “too big to fail,” by breaking up No bank should be “too big to fail,” by breaking up

large institutions, if necessary.large institutions, if necessary. Created Federal Oversight Stability Council to Created Federal Oversight Stability Council to

safeguard overall finan. sector.safeguard overall finan. sector. Banks banned from any operations that are set up Banks banned from any operations that are set up

for their own profit.for their own profit. More regulation and transparency for trading of More regulation and transparency for trading of

derivative products.derivative products. Regulatory oversight of credit rating cos.Regulatory oversight of credit rating cos. New consumer protection agency.New consumer protection agency.

Dodd-Frank — 3 Years LaterDodd-Frank — 3 Years Later

Issuance of regulations (~ 250) has been slow and continuously resisted by members of Congress and the financial industry.

It remains to be seen how effective the new law will be in preventing future reckless and abusive lending practices.

Neighborhoods Neighborhoods

Early results of the three rounds of the Neighborhood Stabilization Program appear disappointing.

Although federal funds have been available to enable cities and towns to purchase and rehabilitate foreclosed homes, the process appears to have been too slow and inflexible to reduce adverse neighborhood effects (Immergluck, 2013).

Federal Assistance to Federal Assistance to HomeownersHomeowners

counseling programs voluntary modification programs, often

with fairly narrow guidelines about eligibility

providing direct support to financial institutions to promote liquidity and

to a much lesser extent, encouraging principal reduction

1) Weak & timid roll-out of 1) Weak & timid roll-out of programs; min. direct benefitsprograms; min. direct benefits Early measures primarily focused on

providing counseling; too modest for the numerous households facing serious financial difficulties.

Bush, then Obama, created loan modification programs designed by the financial industry.

These initial programs were largely unsuccessful.

2) Complex, Confusing 2) Complex, Confusing Names of ProgramsNames of Programs

Program names -- did not clearly describe benefits being offered or were hard to differentiate; low levels of participation.

Bush – FHA Secure

Hope Now Alliance

National Foreclosure Mitigation Prog.

HOPE for Homeowners Obama – HARP and HAMP

Home Affordable Foreclosure Alt.

3) Investors and Lenders Favored over Borrowers

Obama did not radically shift approach Timothy Geithner, former Pres. of NY Fed.

under Bush became Secy. of the Treasury January 2009, Fed. began to buy Fannie/

Freddie mortgage backed securities. While providing indirect help for some middle-

upper income homeowners, the focus was on promoting liquidity to financial institutions and low interest rates.

continued…

The Principal Reduction Alternative program encouraged lenders to lower principal owed.

But modifications had to make more financial sense than foreclosure, or lenders were not obligated to implement them.

Cost/benefit analyses were undertaken from strictly a lender/investor point of view.

No requirement for impacts to be assessed based on net benefits to society or on homeowner or neighborhood needs.

Even if it made financial sense to reduce principal, lenders not required to do so.

4) Loan servicing industry

Orientation more to foreclosure, rather than loan modification.

Based on consistency and volume. But, loan modifications require specialized

attention to each property and borrower. Case-by-case analyses needed and many

guidelines and regs. must be followed. Individualized attention is costly and more

complex than clear default procedures.

5) Carrots/Sticks for Lenders Few requirements placed on lenders/investors; loan

mod. programs typically provided only small incentive payments to servicers.

Sanctions for servicers not following HAMP guidelines, for example, were non-existent until June 2011, and even then they were modest.

Small incentives and lack of serious sanctions could not reverse path to foreclosure by mortgage industry.

   

6) A Strong Stick that Wasn’t6) A Strong Stick that Wasn’t Opportunity for bankruptcy court judge to Opportunity for bankruptcy court judge to

reduce principal on primary residence;reduce principal on primary residence; Passed by House, not by the Senate;Passed by House, not by the Senate; Not pushed by ObamaNot pushed by Obama If servicers/investors had been threatened

with the possibility that a bankruptcy court judge might reduce the principal on the amount owed, this might have stimulated a stronger response from servicers.

The Paths Not TakenThe Paths Not Taken Moral hazard of principal reduction only for Moral hazard of principal reduction only for

some?some? Or could we have tried principal reduction for Or could we have tried principal reduction for

all below a certain income/asset limit? all below a certain income/asset limit? Or, a simpler, more transparent initiative than

the one offered by the FHA Secure program, whereby loans advanced to cure defaults would be repaid upon sale, if a homeowner has positive equity?

continued

Or, could nonprofits have played a larger role by helping to acquire, on an interim basis, properties facing foreclosure with homeowners renting from the nonprofit and then having the option of re-acquiring their home when finances stabilized?

Although small scale, a similar initiative is being carried out by City Life/Vida Urbana and Boston Community Capital; homes are purchased from lenders following a foreclosure and then sold back to the original homeowners, at the newly adjusted, lower market price.

Questions? Questions?