Reason Foundation - Policy Areas > Housing and Mortgages

Loan Modification Program Isn't Stemming Foreclosures in Phoenix

leonard.gilroy@reason.org (Leonard Gilroy) — Sun, 12 Jul 2009 14:04:00 EDT

The day after signing the stimulus bill into law in Denver back in February, President Obama came to Mesa, AZ—a suburb of Phoenix, the nation's foreclosure capital—to announce a new loan modification program aimed at lowering the monthly mortgage payments of homeowners who've taken an income hit in the recession. As the President said in his speech that day:

Through this plan, we will help between seven and nine million families restructure or refinance their mortgages so they can avoid foreclosure. And we are not just helping homeowners at risk of falling over the edge, we are preventing their neighbors from being pulled over that edge too – as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs. . . .[I]t will give millions of families resigned to financial ruin a chance to rebuild. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone. According to estimates by the Treasury Department, this plan could stop the slide in home prices due to neighboring foreclosures by up to $6,000 per home.

Nearly five months later, it makes sense to ask how that program is working out in the foreclosure-ridden Phoenix metro. After all, if the program is performing well here in the Valley of the Sun, it might bode well for the prospects in areas less severely hit, right?

Well, so far, not so good, as Catherine Reagor at the Arizona Republic reports today. And with only about 240,000 loan modifications completed thus far nationally, it looks like the administration is far, far off from its goal of helping 7+ million families avoid foreclosure.

So far the plan isn't working as anticipated. Many eligible Valley homeowners can't reach anyone at their lender who will work with them. More people are losing their jobs, which makes them ineligible for the government-backed program. For many of those who did get a modified payment, there was a harsh discovery. Modifications often were made on a three-month trial basis, and now lenders are revoking the terms - sometimes even when payments are met - and leaving some homeowners with the old payments they can't afford.

In June, foreclosures across metropolitan Phoenix jumped to 5,150, a 35 percent increase from May, reports the research firm Information Market. This jump came after foreclosures fell in March, April and May. Problems with the loan-modification program and the expiration last month of a government-requested lender moratorium on foreclosures are behind much of the Valley's increase, housing analysts say. [...]

Most borrowers and housing advocates blame lenders for loan modifications failing. They say lenders have not responded quickly to borrowers seeking loan modifications. And some lenders who agreed to participate have not developed their own plans for loan modifications. [...]

A new study by the Federal Reserve Bank of Boston found most mortgage lenders don't want to modify loans because they will lose money on the deals. The Fed's study found only about 3 percent of seriously delinquent borrowers had their loans modified to lower their payments. The study focused on loan modifications done during 2008 when lenders were encouraged by the federal government to modify loans and avoid foreclosure but weren't compensated for the modification. [...]

The Obama administration's housing plan calls for modifying mortgages so payments take no more than 31 percent of a borrower's income. To reach that point, lenders are encouraged to cut the interest rate and principal of a loan. But they don't have to do it for free, even though studies show keeping a loan out of default or foreclosure is less costly for lenders.

Lenders get a $1,500 bonus for working with a borrower before the borrower falls behind on payments. In addition, lenders get $1,000 for every loan modification they do. Then for each year the borrower is able to continue paying, the lender receives at least another $1,000 for up to three years. Homeowners get similar reductions in the principal of their loan for each year they stay current. The federal government also will kick in money to reduce the principal on the loan so the lender isn't out tens of thousands of dollars for a mortgage it modifies.

To qualify, borrowers must show they have had a significant change in their income or expenses so they can't afford their current mortgage. Borrowers must have a job to qualify. As the unemployment rate climbs, this element of the plan is becoming a bigger problem. Some borrowers who started the loan modification process have since lost their jobs. [...]

About 240,000 U.S. homeowners have received some type of loan modification through the plan, reports the Treasury Department. A record 5.4 million U.S. homeowners are behind on their mortgage payments. The goal is to use the $75 million to modify 4 million mortgages in the next few years. Many of the current modifications are still in a three-month trial period.

A problem emerging is some lenders are not extending modifications past that trial period. Government-sponsored lenders Fannie Mae and Freddie Mac, which back more than half of all U.S. mortgages, require the trial. The goal is twofold: See if borrowers can make the lower payments and give lenders time to process the new loans. [...]

It's unclear why lenders are revoking some of the modifications, though housing advocates believe lenders may have found foreclosing on Valley homes more worthwhile than modifying the loans. [...]

"The government programs are very challenging," said Sheila Harris, former director of the Arizona Housing Department. "(The programs) aren't flexible and don't respond to market conditions."

That's a pretty damning quote from a former state housing chief, and it helps to cut to the point. Take some program rigidity, add in a cup of unresponsiveness to market conditions, fold in the simple fact that the program is designed to push lenders into doing something they either (a) don't want to do, or (b) might otherwise choose to do on their own (but under their own guidelines and evaluation criteria), and bake that in a hot oven of market uncertainty and ever-shifting housing market conditions—that's sounding to my ears like a recipe for program failure.

Lending Standards Back to Bubble Era Levels

anthony.randazzo@reason.org (Anthony Randazzo) — Thu, 04 Jun 2009 11:57:00 EDT

Seriously, low lending standards are a huge part of what got banks and mortgage companies into this mess. From BusinessWeek:

"Blamed for contributing to the housing bubble, zero-down-payment loans largely vanished when the market crashed and Congress blocked seller financing for government-backed loans. Now the federal government will be forking over cash at closing.

Buyers who haven't owned a home for three years or longer are eligible for an $8,000 tax credit, thanks to a provision in this winter's stimulus package. Now, under a little-noticed program announced May 29, the Federal Housing Administration will steer the funds to cover closing costs directly—in some cases even offsetting the 3.5% minimum down payment FHA loans require. That's enough to cover most or all of the down payment and fees for homes up to the U.S. median price, now about $169,000."

The government does not seem to understand that it is okay if some Americans don't own a home. While home ownership levels have risen slowly over time, they jumped 8% (from around 62% to 70%) during the bubble period, rapid growth that was bound to require many people who simply can't afford a mortgage payment. This is why we have a healthy system of rental properties around the country.

Cutting the down payment on a home certainly will help many responsible home buyers (including one Reason staffer who recently took advantage of the program). But the FHS program is destined to lead to more foreclosures down the road as families, even with the government's help, come to terms with the reality of money. Unfortunately, it is probable that many of those families that will have to foreclose in five years on the government aided home purchase would have been fine waiting a few more years to save and get in a financial position to own a home for the next 40 to 50 years.

Reason on the "little-noticed program" from March.

Reason on Economics, Bailouts, and Stimulus.

A Concise, Modern History of U.S. Homeownership

sam.staley@reason.org (Samuel Staley) — Sun, 10 May 2009 09:09:00 EDT

City Journal senior editor Stephen Malanga has written an excellent, accessible, and concise history of federal efforts to boost homeownership since the 1920s. He does a nice job of showing how the current housing morass is the product of nearly a century of federal meddling by both Democrats and Republicans, each enamored with the holy grail of increasing homeownership.

One gem from the essay is a history of a New Deal program that tried to clean up a mess created during the 1920s by then Commerce secretary Herbert Hoover when he attempted to increase homeownership through the Own Your Own Home campaign. As homeowners became oversextended, foreclosures increased and skyrocketed after the runs on banks sent banks into bankruptcy at the outset of the Great Depression. The federal solution was to create a new program that would prop up homeownership and subsidize mortgages and loans.

The HOLC [Home Owners' Loan Corporation] was a massive new federal agency, employing at its height some 20,000 people—appraisers, loan officers, auditors. By 1936, the agency’s total payroll was $26.2 million, the equivalent of $388 million today. The HOLC eventually received 1.9 million applications for mortgages and approved 1 million. Despite the more favorable terms that the HOLC offered, however, about one-fifth of the new mortgages defaulted, a failure rate that would sink a private-sector bank. Many who failed to pay might have been able to, but chose not to work out any arrangement with the government and essentially challenged the feds to kick them out—which officials were reluctant to do in the face of public opposition. HOLC loan officers classified about 65 percent of the defaults as resulting either from borrowers’ “noncooperation” or “obstinate refusal,” according to an analysis by Columbia University economist C. Lowell Harriss. “This type of noncooperation could sometimes be attributed to a desire to obtain free housing . . . an object that, in view of HOLC’s nature, was not difficult to realize,” Harriss wrote.

The solution? Let the market determine homeownership rates based on the natural growth of the economy and income.

Banks and Mortgage Investors Battle in Congress

anthony.randazzo@reason.org (Anthony Randazzo) — Tue, 05 May 2009 14:30:00 EDT

Though the cramdown threat has been (temporarily) vanquished, there are still more issues Congress is facing that could skew the market. Senator Dick Durbin, who drove the lost fight for cramdowns, separated the measure from a larger bill that passed the House (HR 1106) that is aiming to redefine how the mortgage industry works. The "Helping Families Save Their Homes Act of 2009" (now S.B. 896) also contains provisions that will protect mortgage lenders from being sued by investors for rewriting mortgage terms on their own--measures the Senate supported today.

This has set up a Wall Street Civil War, as The New Republic's Noam Scheiber puts it, between the big banks that are dealing with foreclosed homes that want to restructure them, and investors that do not want to take a loss on the mortgages as a result of a restructuring.

One of the questions I have come back to on this blog on occasion is, why would banks not just restructure a mortgage on their own so that someone could stay in their home if the bank wouldn't be able to sell the home anyway? And one of the reasons is fear of lawsuits from investors that bought securities based on certain contract conditions that they would rather not see restructured. Another is fear from investors that in a restructuring of a mortgage, banks will simultaneously restructure that mortgage with a secondary mortgage that many homeowners have in such a way that banks don't suffer losses, but investors in the first mortgage do.

To fight this, banks have been pushing for "safe harbor", essentially protection from lawsuits by investors if they restructure mortgages. However, the investors have been pushing back that such protection would allow banks to abuse the restructuring privilege. Investors, after all, want to make money of their investment too and have it tied up when the mortgage is in foreclosure. Investors want people in their homes paying for them. They don't like foreclosure either, but they also don't have control of the renewed terms, allowing the mortgage holder to focus only on their own interests. Scheiber writes:

"...it's far from clear that banks won't abuse the safe-harbor provision they've lobbied for; if it passes, the investors could push to prevent them from using it as a shield against liability for peddling fraudulent mortgages. Investors could also play a constructive role on other issues, such as the attempt by banks to return their bailout money quickly in order to wriggle free of pay restrictions. Investors who own the banks' bonds aren't likely to be keen on this, because the bailout money insulates them from potential losses."

So with banks and investors duking it out, the Senate weighed in today, defeating a bill amendment that would have given investors the right to sue, essentially protecting safe harbor, and backing the banks they have also bailed out. The Helping Families Save Their Homes Act in amended form (without cramdowns) remains before the Senate for a vote later this week.

I stand with the investors in this battle, purely on the grounds that banks should be able to restructure loans to avoid losses on a foreclosed home but have the incentives of the investors in mind when they restructure. If they act in good faith in taking some losses on their own, while passing off a justifiable share of losses to the investors, then there should be no grounds for suit. The banks and investors should have the proper incentives to work together, to the benefit of the consumer, not have one favored over the other by Congress.

Update:

I just read this editorial from the New York Times which points out about the cramdown bill that:

"Senator Obama campaigned on the provision. And President Obama made its passage part of his antiforeclosure plan. It would have been a very useful prod to get lenders to rework bad loans rather than leaving the modification to a judge. But when the time came to stand up to the banking lobbies and cajole yes votes from reluctant senators — the White House didn’t. When the measure failed, there wasn’t even a statement of regret."

And that's true... which makes me wonder if there is some political strategy behind allowing cramdowns to fail, but then use safe harbor provisions to achieve the same goal--preventing foreclosures (again, a good endgame, but this way is going to make it more expensive long-term for homebuyers).

Bipartisan Blame for Housing Crisis

sam.staley@reason.org (Samuel Staley) — Sat, 02 May 2009 09:00:00 EDT

Thomas Sowell, the iconoclastic Hoover Institution economist, has a new book out tearing apart the why's, how's, and who's to blame in the housing crisis. The book, The Housing Boom and Bust, dissects the making of a political crisis. In his column at Townhall.com, Sowell writes:

Beginning in the 1990s, getting a higher proportion of the American population to become homeowners became the political holy grail of government housing policies. Increasing home ownership among minorities and other people of low or moderate incomes was also part of this political crusade.

Because banks are regulated by various agencies of the federal government, it was easy to pressure them to lend to people that they would not otherwise lend to-- namely, people with lower incomes, poorer credit ratings and little or no money for a conventional down payment of 20 percent of the price of a house.

Such people were referred to politically as "the underserved population"-- as if politicians know who should and who shouldn't get mortgages better than people who have spent their careers making mortgage-lending decisions.

But, in politics, power trumps knowledge. Banks whose mortgage loan approval rates for "the underserved population" did not match the prevailing preconceptions found that they could not get government regulatory agencies to approve their business decisions on opening new branches or enlarging their financial operations, the way competing banks did when those competing banks met the lending quotas set by the government.

Sowell doesn't spare members of either party. It was an equal opportunity catastrophe, encouraging banks that are by nature conservative to take risks they were ill equipped to assess or evaluate effectively.

Sacramento Homes Now Cost Less Than a Honda Accord

sam.staley@reason.org (Samuel Staley) — Tue, 28 Apr 2009 15:55:00 EDT

The Sacramento Bee has a excellent article on the dynamics of the real-estate market in the post-bubble environment (also known as the housing depression). Sacramento housing prices, like many housing markets on the East and West Coasts, increased much faster than household incomes, a result of the inability of supply to keep pace with demand and speculation. Now, dozens of homes are going on the market at $25,000 or less as banks try to unload them after foreclosure:

Many of the houses became cheap only after the roller-coaster ride of the past few years, as banks sought to unload inventory. On Tuesday, for instance, Deutsche Bank lowered the price on a vacant, 728-square-foot home on 21st Avenue in the heart of Oak Park from $29,000 to $19,000.

The house had belonged to the same family for years. An investor purchased it for $197,000, or $270 per square foot, in mid-2005, property records show.

The city around that time declared it a dangerous, vacant nuisance and started pressuring its owner to clean it up. That case remains open, much like the cases for 200 other vacant buildings (all viewable at sacbee.com/databases)deemed dangerous or substandard for more than a year.

Seven months after buying it, the first investor sold the property again to another out-of-town buyer for $255,000, or $350 per square foot. In December, Deutsche Bank foreclosed. Today, the home is selling for $26 per square foot.

Now, months after banks initially foreclosed, these homes being put back out on the market. At the lower prices, the homes are both affordable and in sync with market demand. The housing market is rationalizing.

Importantly, the private real-estate market is ready to step in and turn coal into gold:

Real estate investor Reggie Lal is happy to oblige.

"At 25K, the risk is out of the market," Lal said. "It's pretty much bottomed."

What Lal does arguably has a more positive impact than speculators who bought $400,000 homes during the boom and sold them for $500,000 a few months later, pricing out regular folks who were unwilling to take on a high-interest loan.

During better times, Lal, who maintains an office for his firm, RL Financial, on the edge of Elk Grove, mostly focused on selling homes he bought during the last bust. Because he buys all his property out of foreclosure, he said, banks, not homeowners, get hurt by the low prices.

After finding a property that interests him, Lal pays cash and starts putting more money into the property. On a $25,000 house, he might add $15,000 in rehab, he said.

When the house is ready, Lal often puts it up for rent. Once he finds a tenant, he can find financing, he said, because the home is habitable and occupied. That rent is likely to cover the entire cost of his house payments – and more.

Then, it's just a matter of waiting until the market improves.

Lal said he's careful to keep his properties maintained, and city records support that contention. Not only does he want them ready to sell, but should tenants become unhappy and leave, he would have to pay financing costs.

Lal has bought at least a dozen low-price properties during the last year, property records show, and sold several after rehabilitating them.

Recession Creates "Kidults"

sam.staley@reason.org (Samuel Staley) — Mon, 13 Apr 2009 16:49:00 EDT

The subprime meltdown burst the housing bubble and the global recession has put the brakes on housing prices. This still doesn't mean that housing is more affordable. This is evident in the United Kingdom where the number of adult children living rent-free with their parents--dubbed "kidults"--has increased from 500,000 last year to 1.6 million this year.

According to London's Daily Telegraph (8 April 2009),

"While an adult living at home until their 30s is more associated with our continental cousins, the research shows that this is a trend that is on the increase here in the UK as well."

It means there's now more than 1.9million Kidults in the UK and with average rents of £441.78 per month, these individuals are saving £839 million.

The research found that areas where house prices are traditionally the most expensive are where more people are unable to afford to buy themselves.

More than 270,000 adults in London alone currently live rent-free and those living in the South of the country are twice as likely to live with others rent-free compared to those living in the North East and North West of the country.

The idea that the recession might cure housing price inflation is misguided. Prices reflect demand and supply. Demand is driven in large part by income (and demographics). Strong economies drive up the demand for housing.

At the end of the day, high housing prices most often reflect supply constraints. Until supply increases to meet demand, these booms, busts, and bubbles are inevitable.

Has the Housing Market Hit Bottom?

sam.staley@reason.org (Samuel Staley) — Mon, 06 Apr 2009 08:00:00 EDT

Last week, Standard and Poor's released the Case-Shiller housing price index which showed a continued drop in home prices in every one of the 20 metro areas it tracks. This isn't the whole story, however, because the National Association of Realtors reported just a few days later that new home sales were up in February.

This is good news because it suggests in some markets the back log of inventory may be hitting bottom. This may be particularly true in metro areas such as Miami, San Francisco, and Las Vegas where prices have fallen by more than 40% from their peak. The large inventory, combined with low prices, means those potential buyers with good credit histories and cash can buy up homes at a bargain.

The Realtors estimate that 45 percent of the homes being purchased are in foreclosure or in some form of financial distress. The Mortgage Bankers Association also reports an increase in mortgage activity, although 80 percent of the loan volume is refinancing at lower interest rates.

Notes David Crowe, chief economist at the National Assocation of Hombe Builders:

Crowe cautioned that certain negative factors must still be addressed, including tight credit conditions for home buyers as well as the still-rising inventory of foreclosed homes on the market.

Indicating that builders are keeping a tight rein on inventories, the number of unsold new homes on the market continued to decline for the 22nd consecutive month to 330,000 units in February. The months’ supply also declined, to 12.2 in February, down from 12.9 in the previous month.

Regionally, new-home sales rose strongly in the two largest markets in February, with gains of 9.7 percent in the South and 6.6 percent in the West. However, sales numbers declined in the Northeast and Midwest, by 3.3 percent and 9.1 percent, respectively.

So, we're not out of the woods yet, but at least we're on a path worth following.

Urban Planning, Foreclosures and the Recession

sam.staley@reason.org (Samuel Staley) — Thu, 12 Mar 2009 00:35:00 EDT

My recent blog post on Planetizen.com's Interchange sparked an extensive debate and discussion on the role of land-use planning and the housing bubble. The discussion thread does a good job of encapsulating some of the main concerns and rebuttals by professional planners when someone raises the simple possibility that growth controls increase housing costs.

Reason has published several studies on the impact of growth management laws, including ones on Washington State and Florida here, and an update on Florida for the James Madison Institute here.

Planning, Housing Foreclosures, and the Recession

sam.staley@reason.org (Samuel Staley) — Sat, 07 Mar 2009 16:06:00 EST

Planning critics Randal O'Toole and Wendell Cox have stumped for planning's role in causing the housing crisis for a long time, and their insights have been largely ignored. USA Today, however, recently provided some compelling data supporting their thesis (and to a lesser extent ours).

USA Today reporters tracked foreclosures and found (not surprisingly) that just 35 counties captured the lionshare of foreclosures. These counties made up 20% of the US population and 50% of the mortgage defaults, home repossessions, and home auctions.

More than half of the nation's foreclosures last year took place in 35 counties, a sign that the financial crisis devastating the national economy may have begun with collapsing home loans in only a few corners of the country. Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year, a USA TODAY analysis of figures compiled by the real estate listing firm RealtyTrac shows — more than were recorded in the entire United States just two years earlier. They were the epicenter of a wave of foreclosures that have left leading banks teetering and magnified the nation's economic problems.

The foreclosures in these counties started a ripple effect that led to the collapse of the financial system.

But, it's the geography that's important. The top 35 counties are dominated not by weak indusrial states, but high cost housing markets.

In other parts of the country, the foreclosure wave was barely a ripple — at least until it started swamping major banks that had invested heavily in mortgages. Banking giant Wachovia Corp., for example, was hammered after California and Florida customers of one mortgage firm it bought began defaulting at high rates. The risks of such lending were spread so broadly among financial institutions that, when the loans went bad, it drove the national credit crisis, says Christopher Mayer, who studies real estate at Columbia Business School.
A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble.

Indeed, the USA Today article points out 25% of the nation's foreclosures last year were concentrated in just eight counties in Arizona, California, Florida, and Nevada.

In another, earlier analysis, USA Today looked at 2008 foreclosure rates and ranked the states with the highest rates. Here are the top ten states fore foreclosures per 1,000 poopulation in 2008 (the national average was 1.8%):

1. Nevada, 7.3%
2. Arizona, 4.5%
3. Florida, 4.5%
4. California, 4.0%
5. Colorado, 2.4%
6. Michigan, 2.4%
7. Ohio, 2.3%
8. Georgia, 2.2%
9. Illinois, 1.9%
10. New Jersey, 1.8%

The top five were all bubble housing markets--experiencing dramatic increases in supply as a response to high housing demand. Often, housing price increases outstripped the increases in household income by large multiples, severely limiting their ability to pay off the mortgage once the market stabilized.

But, some of theses states, most notably California and Florida, are notorious for their restrictive planning laws. A closer look at the clustering within states reveals that the foreclosures are highest in counties around the San Francisco Bay Area, the Florida coasts, and the suburban areas around Washington, DC. The Bay Area has some of the most restrictive laws in the nation. Maryland is not known for its market-based planning, and several high-growth counties in Viriginia have adopted significant growth controls.

The correlation is not perfect, but the evidence is growing that, on the margin, restrictive planning laws make a difference and they should be noted. Indeed, our study of the impact of Florida's statewide growth management law suggested that 16%, and as much as 20%, of the growth in housing prices at the county level could be explained by the implementation procedures imbedded in the law. We found similar results in Washington State a couple of years earlier.

It's time to take a fresh look at planning's role in causing the housing crisis.

Government Skews Market, Foreclosure Rescue Linked to Drop in Mortgage Applications

anthony.randazzo@reason.org (Anthony Randazzo) — Wed, 04 Mar 2009 14:55:00 EST

More details on the White House plan to rescue struggling homeowners were released today. This USAToday/Reuters report has a rundown of the new details.

Interestingly, the article points out that mortgage applications and mortgage refinancing applications "dropped for a second straight week last week as potential borrowers held back in hope of even lower mortgage rates and help from the Obama rescue program. The Mortgage Bankers Association's total applications index slid by nearly 13% to about half the level it had reached earlier this year when loan rates fell to 4.89%."

No clearer evidence can be presented than this to show how government activity skews the market. The announcement of the plan may actually be what makes it necessary to even have the plan in the first place. Meanwhile, businesses are suffering losses that are unnecessary for the moment because of the government activity... and in the middle of a recession no less.

Not helpful.

Housing Plan and Cramdown on TALF

mike.flynn@reason.org (Michael Flynn) — Wed, 04 Mar 2009 10:12:00 EST

Yesterday, Federal Reserve Chairman Ben Bernanke outlined more details of the government’s long-promised “TALF” (Term Asset-backed securities Loan Facility) program designed to resuscitate the securitization market.

It is impossible to overstate how important this is. As the chart shows, the majority of credit in our economy is provided through securitizations. Mortgages, credit cards, auto and student loans, among other types of credit are all provided through securitizations. Since the onset of the financial crisis, the securitization market has shrunk to about zero. Even if all the banks magically become healthy and start full lending again, there will still be a giant hole in the consumer credit market. A recent study from McKinsey noted:

“…banks may fail to meet approximately $2 trillion of demand for credit origination globally over the next three years in the absence of well-functioning securitization markets.”

Unfortunately, TALF already may be doomed by another Administration priority; the housing rescue plan. Much has already been said of the moral hazard of the plan; the government’s unprecedented move to directly pay a portion of certain people’s mortgages.

The bigger danger is that by forcing a change in the terms of certain mortgages, the plan will further destabilize the securitization market. Every one of the mortgages that would be “modified” is tucked away in one of those “toxic assets” currently sucking a hole in financial balance sheets. Because the borrowers will be paying some dollar amount less than they otherwise would have, those assets would be worth less.

Worse, the plan would allow judges to rewrite mortgage terms during a bankruptcy proceeding, the so-called "cramdown" provision. House Democrats plan a vote on this provision as soon as tomorrow. If the market for mortgage-backed securities ever returns, how would you price for this? How would you model which mortgages might, at some point in the future, go through bankruptcy or how some individual judge might decide to modify the loan? This provision would be a ticking-time bomb, sitting in the middle of the security. Who would want to touch that?

Plus, it raises the prospect of government mucking around in other loan products. If government decides to modify mortgages, why not auto, student or credit card backed securities? In the current political climate, who wants to take that risk? Even if TALF "worked" and new credit-backed securities were issued, would anyone want to buy them?

The Obama housing plan may be a cure that treats the disease, but kills the patient.

Housing Market Resilience and Affordability in Houston, Texas

sam.staley@reason.org (Samuel Staley) — Fri, 27 Feb 2009 00:00:00 EST

The median price of a single-family home in Houston dropped 8.5 percent compared to January 2008, according to the Houston Association of Realtors. But Houstonians are still much better off than many other major cities. The S&P/Case-Shiller home-price index finds prices in Phoenix have fallen 34 percent over the last year, 33 percent in Las Vegas, and 31 percent in San Francisco.

A new Reason Foundation policy brief finds that Houston’s housing market adapts to changing economic conditions better than the housing markets in other major cities, in part because it is the only major U.S. city without zoning regulations. The brief says this allows the region to maximize flexibility and accommodate housing diversity.

The report says the region’s lack of zoning policies and wide range of land use options helped it when the housing bubble began to burst. For example, between 2005 and 2007, the number of average monthly residential permits issued in Houston fell by 17.7 percent, which was less than half of the decline seen in Dallas-Fort Worth (44 percent) and San Antonio (35.9 percent).

“Houston’s largely free-market approach to land development has been widely criticized by the planning profession,” said Sam Staley, the report’s author and director of urban growth and land use policy at Reason Foundation. “An analysis of residential market trends, however, finds that Houston’s housing market has been more resilient and robust than other cities in Texas, even in the face of what is widely considered an unprecedented housing downturn. Moreover, this resilience is particularly notable for multifamily housing, a residential sector most cities struggle to nurture and accommodate.”

Time to reform, fully privatize Fannie and Freddie

sam.staley@reason.org (Samuel Staley) — Thu, 15 Jan 2009 10:10:36 EST

The Winter 2008-09 issue of Regulation magazine has an article by University of California at Berkeley finance professor Dwight Jaffee arguing for the full privatization of recently nationalized mortgage giants Fannie Mae and Freddie Mac. Jaffee presents an alternative reform that refocuses Fannie and Freddie on the middle-income mortgage market. This allows them to be fully privatizated, letting the Federal Housing Administration (FHA) and VA focus on the low-income housing market.

This article has provided a framework and a specific proposal for the reregulation of Fannie Mae and Freddie Mac in the aftermath of the subprime mortgage crisis and their conservatorship. The mimp proposal would end the mortgage giants as we know them, reassembling the components of the two gses into an equitable and efficient structure. Fannie and Freddie's mbs issue/guarantee business would be transferred to a government agency, where it would support the middleincome mortgage market in the United States in parallel with the longstanding and successful fha and Ginnie Mae programs for lower-income mortgages. The retained mortgage portfolios would be spun off to the gses' shareholders, thereby respecting the shareholders' ownership rights. The mimp plan appears superior to other possible solutions, including a public utility model and covered bonds.

NYT series on the housing crisis

sam.staley@reason.org (Samuel Staley) — Sat, 20 Dec 2008 05:32:56 EST

The New York Times has an extraordinary and useful series of articles on the housing and financial crisis. It will likely become a core reference point for news and reporting on this issue, and no one is spared from their analysis, including lenders, financial regulators, White House policies, Alan Greenspan, New York Sen. Charles Schumer, former HUD secretary Henry Cisneros, Wall Street financial houses, and others.

McDonald's as an engine of economic development

sam.staley@reason.org (Samuel Staley) — Fri, 07 Nov 2008 08:13:51 EST

With all the criticism of fast food and their companies in recent years, it's nice to see some nuanced research on the economic value of these companies. This article on the benefits of McDonald's to developing nation economies is one of the most downloaded articles from the academic journal, the Global Economy Journal. Here's the abstract:

McDonald's -- Much Maligned, But an Engine of Economic Development Adrian E. Tschoegl, Wharton School of the University of Pennsylvania Abstract Critics have excoriated the US fast-food industry in general, and McDonald's most particularly, both per se and as a symbol of the United States. However, examining McDonald's internationalization and development abroad suggests that McDonald's and the others of its ilk are sources of development for mid-range countries. McDonald's brings training in management, encourages entrepreneurship directly through franchises and indirectly through demonstration effects, creates backward linkages that develop local suppliers, fosters exports by their suppliers, and has positive external effects on productivity and standards of service, cleanliness, and quality in the host economies. Recommended Citation Tschoegl, Adrian E. (2007) "McDonald's -- Much Maligned, But an Engine of Economic Development," Global Economy Journal: Vol. 7 : Iss. 4, Article 5. Available at: http://www.bepress.com/gej/vol7/iss4/5

Asphalt Nation? Where? Not in the US

sam.staley@reason.org (Samuel Staley) — Thu, 30 Oct 2008 13:33:05 EDT

One of the more enduring myths about the mobility Americans have embraced and the freedom cars provide us is that its unsustainable because we can't continue to pave over America. America has become an "Asphalt Nation." It's a nice bumper sticker but, like most bumper stickers, it's wrong and even conveys bad information. The most recent contribution to this myth comes from the San Francisco Chronicle:

What if we paved over the whole state of Wisconsin? Actually, we already have. According to recent Federal Highway Administration figures, the United States has close to 240 million motor vehicles - almost 40 million more cars than licensed drivers - and just under 4 million miles of paved roads for them to run on. All told, some 61,000 square miles of the United States - an area a little smaller than the Badger State - is solidly paved over, either with roads or with parking. And, of course, there's always more pavement on the way.

Let's take a closer look at these numbers. 61,000 square miles seems like a lot, until you compare it to the surface area of the United States. The US includes 3.5 million square miles according to the U.S. Bureau of the Census. That works out to about 1.7% of the nation "covered by asphalt." Even if we exclude Gov. Palin's home state, which takes up 570,380 square miles (9.3 times the size of Wisconsin), our roads take up 2% of the nation's surface land area. In short, we aren't an "asphalt nation" and never have been.

White House take on GSEs and the financial meltdown

sam.staley@reason.org (Samuel Staley) — Thu, 09 Oct 2008 06:01:30 EDT

THE WHITE HOUSE Office of the Press Secretary _______________________________________________________ For Immediate Release October 9, 2008 Setting The Record Straight Six Years Of Unheeded Warnings For GSE Reform The Washington Times Fails To Research The Administration's Efforts To Reform Fannie Mae And Freddie Mac Today, the Washington Times incorrectly accused the White House of ignoring warnings of trouble ahead for government-sponsored enterprises (GSEs) and neglecting to "adopt any reform until this summer," when it was too late. "Neither the White House nor Congress heeded the warnings, Fannie and Freddie retained strong bipartisan support during the 1990s and early part of this decade." (Editorial, "Hear, See And Speak No Evil About Fannie And Freddie," The Washington Times, 10/9/08) Over the past six years, the President and his Administration have not only warned of the systemic consequences of failure to reform GSEs but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties. In fact, it was Congress that flatly rejected President Bush's call more than five years ago to reform the GSEs. Over the years, the President's repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems with the GSEs. 2001 ? April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity." (2002 Budget Analytic Perspectives, pg. 142) 2002 ? May: The Office of Management and Budget (OMB) calls for the disclosure and corporate governance principles contained in the President's 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02) 2003 ? February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ? September: Then-Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements. ? September: Then-House Financial Services Committee Ranking Member Barney Frank (D-MA) strongly disagrees with the Administration's assessment, saying "these two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis ... The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." (Stephen Labaton, "New Agency Proposed To Oversee Freddie Mac And Fannie Mae," The New York Times, 9/11/03) ? October: Senator Thomas Carper (D-DE) refuses to acknowledge any necessity for GSE reforms, saying "if it ain't broke, don't fix it." (Sen. Carper, Hearing of Senate Committee on Banking, Housing, and Urban Affairs, 10/16/03) ? November: Then-Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03) 2004 ? February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital and calls for creation of a new, world-class regulator: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore ... should be replaced with a new strengthened regulator." (2005 Budget Analytic Perspectives, pg. 83) ? February: Then-CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04) ? April: Rep. Frank ignores the warnings, accusing the Administration of creating an "artificial issue." At a speech to the Mortgage Bankers Association conference, Rep. Frank said "people tend to pay their mortgages. I don't think we are in any remote danger here. This focus on receivership, I think, is intended to create fears that aren't there." ("Frank: GSE Failure A Phony Issue," American Banker, 4/21/04) ? June: Then-Treasury Deputy Secretary Samuel Bodman spotlights the risk posed by the GSEs and calls for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04) 2005 ? April: Then-Secretary Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America ... Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05) ? July: Then-Minority Leader Harry Reid rejects legislation reforming GSEs, "while I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that could limit Americans from owning homes and potentially harm our economy in the process." ("Dems Rip New Fannie Mae Regulatory Measure," United Press International, 7/28/05) 2007 ? August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying "first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options." (President George W. Bush, Press Conference, the White House, 8/9/07) ? August: Senate Committee on Banking, Housing and Urban Affairs Chairman Christopher Dodd ignores the President's warnings and calls on him to "immediately reconsider his ill-advised" position. (Eric Dash, "Fannie Mae's Offer To Help Ease Credit Squeeze Is Rejected, As Critics Complain Of Opportunism," The New York Times, 8/11/07) ? December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon." (President George W. Bush, Discusses Housing, the White House, 12/6/07) 2008 ? February: Assistant Treasury Secretary David Nason reiterates the urgency of reforms, saying "A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully." (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08) ? March: President Bush calls on Congress to take action and "move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages." (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08) ? April: President Bush urges Congress to pass the much needed legislation and "modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by ... helping people stay in their homes." (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08) ? May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further. ? "Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow state housing agencies to issue tax-free bonds to refinance sub-prime loans." (President George W. Bush, Radio Address, 5/3/08) ? "[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator." (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08) ? "Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans." (President George W. Bush, Radio Address, 5/31/08) ? June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying "we need to pass legislation to reform Fannie Mae and Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08) ? July: Congress heeds the President's call for action and passes reform legislation for Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing. ? September: Democrats in Congress forget their previous objections to GSE reforms, as Senator Dodd questions "why weren't we doing more, why did we wait almost a year before there were any significant steps taken to try to deal with this problem? ... I have a lot of questions about where was the administration over the last eight years." (Dawn Kopecki, "Fannie Mae, Freddie 'House Of Cards' Prompts Takeover," Bloomberg, 9/9/08) # # #

Thanks, But No Thanks California: You can keep your anti-mobility enviro policies

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 30 Sep 2008 10:59:37 EDT

Many environmental policy ideas that have originated in California over the last century—some decent, but most ill-conceived—have been replicated in other states and even at the federal level. For the sake of mobility, freedom and choice, here's an idea that we hope stays contained to the Golden State (and hopefully even falls apart there):

Gov. Arnold Schwarzenegger signed a landmark bill Tuesday to discourage sprawl in future decades, completing a deal among environmentalists, homebuilders and local governments on the final day of bill signing. Senate Bill 375, by Democratic Sen. Darrell Steinberg of Sacramento, will push California communities to consider climate change impacts of development in regional planning, with an emphasis on reducing car travel. Environmentalists and other proponents feared the bill was in trouble as Schwarzenegger officials raised transportation and business concerns last week. But the Republican governor ultimately embraced SB 375 as a "first in the nation" effort to link land-use planning and greenhouse-gas reductions. "This legislation constitutes the most sweeping revision of land-use policies since Gov. Ronald Reagan signed the California Environmental Quality Act (CEQA)," Schwarzenegger wrote in a statement. The bill requires the California Air Resources Board to set regional targets by September 2010 for reducing greenhouse-gas emissions. The state will use its annual $5 billion pot of transportation money to encourage regions to embrace compact residential development. The legislation also will relax CEQA requirements for housing projects that meet goals for reducing greenhouse-gas emissions, giving homebuilders incentive to pursue high-density projects near transit. Steinberg sees SB 375 as a necessary step to meet the state's greenhouse-gas reduction goals. Under 2006's AB 32, the state must reduce its greenhouse gases 25 percent by 2020. "This fundamentally changes the way we think about growth," Steinberg said. "It does not reduce growth. I think growth is inevitable and a good thing. But it will allow California to grow in ways that are sustainable for our environment."

Dubious here would be an understatement. Hmmmm...sustainable for the environment? What about the economy, one of the three "Es" of sustainability (environment, economy, equity)? It's hard to imagine that such a massive attempt at state interventionist, centralized planning with such an impact on mobility and land use would have no bearing on what is generally regarded as a terrible economic climate to do business. And the history of lofty promises and failed delivery in urban planning certainly cast doubt on the very notion that this would do anything more than add another layer of red tape and poor planning to an already onerous regulatory framework. Back to the article:

Some business groups remained critical because the bill did not allow commercial development to benefit from CEQA changes. And some local officials said it overreached by allowing the state to dictate greenhouse-gas reduction goals for each region. Proponents believe the measure will push communities to pursue more infill projects and new communities that are transit-focused, discouraging car travel despite future population growth. Transportation, including commute and errand traffic and trucks carrying goods, accounted for 38 percent of California's greenhouse-gas emissions from 2002 to 2004, according to a CARB report. The bill is based on a "smart growth" plan adopted by the Sacramento Area Council of Governments. "Californians will see more infill," said SACOG Director Mike McKeever. "They'll see higher-density housing, particularly in transit corridors. The new areas will look more like existing neighborhoods with a mix of uses between schools, stores and housing."

If local governments want to jump into the murky waters of smart growth, fine. They can take that (high) risk of failure to achieve their goals, and local voters can throw the bums out if they don't deliver on their "ma and pa, picket fences, and apple pie" promises. But we know from our research that the states that have bestowed strong land use powers to the state—taking it from the local level, its proper place—haven't exactly delivered on the promises pitched to sell the idea to other policymakers. In short, expect the opposite of what proponents claim as this moves into implementation. My colleague Sam Staley recently wrote this accurate summation (IMO) of SB 375:

Senate Bill 375 is the state's latest far-reaching piece of legislation intended to help to meet one objective: reduce greenhouse gas emissions by 30 percent by 2020. To cut emissions, the government will take a more active role in where you live, how you get there, and what kind of home you live in. While this legislation thankfully stripped away specific regional targets that would have been far more draconian, the core governing values underlying California's approach should sound alarms in and out of the state. [. . .] A sustainable communities strategy is planning jargon for reducing carbon dioxide. It's the only criterion that counts in SB 375. Neighborhoods could become mired in crime, failing infrastructure, and poor schools, but if they reduce carbon dioxide emissions they would be considered sustainable and conform to the SCS. This is Sacramento's idea of "smart growth." An outcome as dire as this isn't as far flung as it seems. The way California communities are expected to achieve lower carbon dioxide levels is by dramatically reducing mobility. Automobiles and light trucks, the legislation claims, emit 30 percent of the state's greenhouse gas emissions. So the solution is to reduce driving, measured by vehicle miles traveled. Such a grand, sweeping overhaul of land development will have significant negative consequences. Mobility will be greatly reduced since public transit (and walking) almost always takes significantly longer to reach destinations than automobile travel in California. Economic productivity will fall because companies will have access to fewer qualified workers within acceptable commuting distances. Job mobility will be limited since changing jobs will likely entail moving an entire household to a new home to avoid inordinately long commutes. Fortunately, California planners can't outright ban the use of cars - yet, or limit them to particular groups of people, as they do in places such as Singapore. Instead, cities and counties are required to achieve their greenhouse emissions targets using the obtuse and indirect method of changing land use. In other words, communities are expected to make driving so difficult and expensive that people will either walk or use transit. Politicians in Sacramento don't seem bothered by the fact that driving a hybrid automobile, such as the Prius, beats every public transit mode on carbon dioxide emissions except heavy rail. Regional planners nevertheless are supposed to use their models to dramatically increase residential densities, and use smart growth planning to funnel new growth into "transit priority projects." A transit priority project must have a minimum density of 20 dwelling units per acre, a standard that effectively prohibits single-family homes with a yard. Dramatically reducing automobile use means stuffing families into dense urban-living environments. Goodbye house, hello high rise. You didn't really want a yard (or a car) anyway. The bill stops short of explicitly mandating that all new development follow these rules, but the practical effect will likely be the same. [. . .] Sadly, California legislators didn't have to take this latest path. They could have recognized the value of mobility and the importance Californians place on housing choice by using deregulation and market incentives to enhance freedom and cut emissions. They could have streamlined the planning process, eliminating politics and red tape, while promoting mixed-use developments that don't restrict other choices. Mixing condominiums and retail space, single-family homes and townhouses are not bad outcomes if they are desired by consumers. On the energy front, they could have focused on market-based technological solutions to our energy needs, such as allowing the private sector to build nuclear power plants to produce electricity or streamlining the permitting process for wind power. Moving public utilities to market-based pricing for electricity, water and sewer, would also go a long way toward encouraging conservation and the development of alternative energy sources. In the end, as it often does, the California legislature took the path of rigid control and top-down planning in ways that will hurt the state's residents and businesses.

As an aside, I watched a PBS special on Ronald Reagan recently, and it reminded me of what a shame it is that the state has deteriorated so much, policy-wise, since his days as Governor. I wonder what he would think of the dismal state of things today, with people and businesses fleeing over-taxation and over-regulation (and btw, bringing lots of silly ideology with them to places like Arizona, where I live now). Unions have a virtual lock on the legislature, so innovative ideas from spending reform to transportation funding to market-based environmental policies have virtually no chance of moving forward. It's sad to see what should be a leading state on a steady decline, led by a legislature bent on compounding its problems through thinly-veiled collectivism, hastening its malaise. Contrast that with Texas, its polar opposite. Texas is sitting on billions in surplus right now, has passed tort reform, has no state income tax and a far friendlier business tax climate, has little state welfare to speak of, and is set to explode through the growth it's attracting. In Texas, cities can do planning and zoning, counties cannot, and the state has no interest in usurping local land use control. What's the key difference? Policymakers in Texas, from Governor Perry on down, seem to get the one key thing that California policymakers forgot a long time ago: economic maturity drives social progress. This is especially true in environmental policy. We know from global experience that countries cannot focus on environmental improvement without having the economic maturity to be able to facilitate it—put differently, you need a decent economy before you can tackle big environmental issues, because environmental gains come with a significant price tag. Reversing the order here—adopting counterproductive environmental policies at the expense of economic vitality—is practically guaranteeing that the only road soon to be left to drive on in California is the road to serfdom. And with the bailout swirling in DC, that road is starting to get congested. Let's hope other states don't take inspiration from a peer that doesn't deserve to be followed. » Reason's Growth and Land Use Research and Commentary

Risky Mortgage Investment a Global Phenomenon

sam.staley@reason.org (Samuel Staley) — Sun, 28 Sep 2008 05:53:17 EDT

Anyone thinking that the subprime disease is an American problem should read this article from the UK's Telegraph. The Brits are about to nationalize Bradford & Bingley, the 8th largest mortgage lender, for the same reason the US is poised to bailout our banks--risky loans and mortgages to what the Brits call "amateur" homebuyers (first time buyers). Eighty percent of the bank's mortgages are to these borrowers that, as in the US, "self certify" their income. Reports the Telegraph:

The Government may merge the bank, which has mortgages worth more than �40 billion, with the nationalised Northern Rock. Every taxpayer in Britain will be exposed to the equivalent of �5,500 in mortgage debt as a result. In another day of frantic action around the world, the American Government also agreed a $700 billion deal to take on bad banking debts following several days of intense talks in Washington. However, British taxpayers are now more exposed to mortgage debts than their American counterparts, who are saddled with the equivalent of �2,750 per taxpayer. European regulators were also rushing last night to rescue Fortis, a large Belgian bank, which is Britain's third biggest motor insurer. Fears are mounting about the viability of Wachovia, an American bank seeking a takeover. Investors are braced for another volatile day on share prices as stock markets digest the various rescue packages now being launched. The Centre for Economics and Business Research (CEBR), a leading forecaster, will today predict that the British economy will fall into recession in the second half of this year. It believes that the economic prospects could worsen even further if the Treasury and Bank of England cannot re-establish confidence in the financial markets.

The perspectives of free market economists can be found here. More from Reason Foundation on the financial crisis can be founder here , here, and here.

statement of the president on financial bailout deal

sam.staley@reason.org (Samuel Staley) — Sun, 28 Sep 2008 05:49:43 EDT

THE WHITE HOUSE Office of the Press Secretary _________________________________________________________________ For Immediate Release September 29, 2008 STATEMENT BY THE PRESIDENT ON FINANCIAL RESCUE LEGISLATION South Drive 7:34 A.M. EDT THE PRESIDENT: Good morning. Yesterday, leaders here in Washington reached an extraordinary agreement to deal with an extraordinary problem in our economy. Working closely with my administration, congressional leaders from both parties produced the Emergency Economic Stabilization Act -- a bold bill that will help keep the crisis in our financial system from spreading throughout our economy. This legislation deals with complex issues, and negotiators were asked to address them in a very short period of time. I appreciate the leadership of members on both sides of the aisle, who came together when our nation was counting on them. Negotiations are sometimes difficult, but their hard work and cooperation paid off. The bipartisan economic rescue plan addresses the root cause of the financial crisis -- the assets related to home mortgages that have lost value during the housing decline. Under the Emergency Economic Stabilization Act, the federal government will be authorized to purchase these assets from banks and other financial institutions, which will help free them to resume lending to businesses and consumers. The bill also includes other important ideas put forward by members of Congress from both parties. For example, the bill requires the establishment of a guarantee program that will insure assets at no cost to the taxpayer. The bill provides strong, bipartisan oversight so Americans can be certain that their tax dollars are used carefully and wisely. The bill ensures that failed executives do not receive a windfall from your tax dollars. With this strong and decisive legislation, we will help restart the flow of credit, so American families can meet their daily needs and American businesses can make purchases, ship goods, and meet their payrolls. We'll make clear that the United States is serious about restoring confidence and stability in our financial system. I know many Americans are worried about the cost of the bill, and I understand their concern. This bill commits up to 700 billion taxpayer dollars, because a large amount of money is necessary to have an impact on our financial system. However, both the non-partisan Congressional Budget Office and the Office of Management and Budget expect that the ultimate cost to the taxpayer will be far less than that. In fact, we expect that over time, much -- if not all -- of the tax dollars we invest will be paid back. Now that this legislation has been agreed to by leaders of both parties, it must be passed by houses -- both houses of Congress. And I fully understand that this will be a difficult vote. But with the improvements made to this bill, I'm confident that members of both parties will support it. Congress can send a strong signal to markets at home and abroad by passing this bill promptly. Every member of Congress and every American should keep in mind: A vote for this bill is a vote to prevent economic damage to you and your community. This has been a volatile time for our financial system and our economy. Even with the important steps we're taking to address the current crisis, we will continue to face serious challenges. The impact of the credit crisis and the housing correction will continue to pressure our financial system and impact the growth of our economy for some time. But I'm confident that this rescue plan -- along with other measures taken by the Treasury Department and the Federal Reserve -- will begin to restore strength and stability to America's financial system and overall economy. And I'm confident that in the long run, America will overcome these challenges and remain the most dynamic and productive economy in the world. Thank you. END 7:38 A.M. EDT

statement of the president on reaching a bailout deal

sam.staley@reason.org (Samuel Staley) — Thu, 25 Sep 2008 07:26:42 EDT

THE WHITE HOUSE Office of the Press Secretary _________________________________________________________________ For Immediate Release September 26, 2008 STATEMENT BY THE PRESIDENT REGARDING THE NEGOTIATIONS TO FINALIZE LEGISLATION ON THE FINANCIAL RESCUE PACKAGE Oval Colonnade 9:40 A.M. EDT THE PRESIDENT: Good morning. My administration continues to work with the Congress on a rescue plan. And we need a rescue plan. This is -- it's hard work. Our proposal is a big proposal. And the reason it's big and substantial is because we got a big problem. We also need to move quickly. Now, anytime you have a plan this big, that is moving this quickly, that requires legislative approval, it creates challenges. Members want to be heard. They want to be able to express their opinions, and they should be allowed to express their opinions. There are disagreements over aspects of the rescue plan, but there is no disagreement that something substantial must be done. The legislative process is sometimes not very pretty, but we are going to get a package passed. We will rise to the occasion. Republicans and Democrats will come together and pass a substantial rescue plan. Thank you very much. END 9:42 A.M. EDT

America's top performing cities

sam.staley@reason.org (Samuel Staley) — Thu, 11 Sep 2008 07:39:28 EDT

From our friends at the National Center for Policy Analysis and their awesome digest of policy news, Daily Policy Digest, we have this summary of the Milken Institute's recently released study of the top performing cities in the US:

NEW REPORT RANKS AMERICA'S TOP-PERFORMING CITIES What are America's best-performing cities? Cities with strong technology, energy and trade sectors lead the nation in job creation, according to a report released today by the Milken Institute and Greenstreet Real Estate Partners. In the 2008 Best-Performing Cities Index, Provo, Utah, leads the rankings, which are dominated by thriving metro areas in Texas, Washington, Utah, Alabama and the Carolinas. The annual index provides a snapshot of where America's jobs are being created and sustained. It factors in both long- and short-term indicators of employment and salary growth, as well as technology output measurements. The 2008 results reveal a broad rebound in the technology sector, plus strong activity in exports and energy production: The top cities, one through five respectively, with their 2007 rankings in parentheses are: Provo-Orem, Utah (8); Raleigh-Cary, North Carolina (10); Salt Lake City, Utah (18); Austin-Round Rock, Texas (20) and Huntsville, Alabama (16). The top cities, six through 10 respectively, with their 2007 rankings in parentheses are: Wilmington, North Carolina (2); McAllen-Edinburg-Mission, Texas (7); Tacoma, Washington (50); Olympia, Washington (37 in the 2007 ranking of small metros); and Charleston-North Charleston, South Carolina (12). Several metros that once topped the rankings fell due to a sharp downturn in their housing and construction markets; formerly booming locations in Florida and California took particularly significant hits. Cities in the industrial Midwest that depend on manufacturing also continue to suffer a long-term decline. Source: Ross DeVol, Armen Bedroussian, Kevin Klowden and Soojung Kim, "Best-Performing Cities 2008: Where America's Jobs Are Created and Sustained," Milken Institute, September 10, 2008.

Growth Mgt Reduces Housing Affordability in Florida

sam.staley@reason.org (Samuel Staley) — Tue, 09 Sep 2008 04:41:15 EDT

Florida is recognized as a national leader in the "Smart Growth" movement. The state has given housing goals a special prominence in regional and urban planning, explicitly requiring its cities to plan for a diverse range of housing needs and types. Nevertheless, despite statewide planning goals and specific programs designed to promote affordable housing, housing costs have been increasing in Florida faster than the national average. According to the National Association of Realtors, home prices in Florida exceeded the national average for the first time in 2005. Housing price increases have also outpaced income growth. Indeed, since 1994, housing price inflation has outstripped income growth by a factor of two to one. Housing affordability has suffered declining significantly after 2000. Florida's housing opportunity index–a measure created by the National Association of Homebuilders of how many households can afford the "median" home based on income and housing price–has eroded sharply, particularly since 2005, falling well below the national level by 2007. While affordability nationwide was just over 10 percent lower in 2007 than it was in 1991, affordability in Florida has plummeted by more than 50 percent over the same time period and has eroded by nearly 60 percent since its peak of 80.7 in 1994. A handful of studies have examined Florida's housing market, including one conducted by Reason Foundation in 2001. Our analysis found that statewide planning under Florida's Growth Management Act (GMA) may have contributed as much as 20 percent to rising housing costs between 1994 and 2000. In partnership with the James Madison Institute, Reason analysts recently updated and extended the 2001 study by analyzing housing price data from 1990 to 2006. A statistical analysis of housing trends in 56 of Florida's 67 counties found that as much as 16 percent of housing-price inflation during that time period can be attributed to planning under the state's GMA, a result consistent with previous analysis and research. The updated evidence confirms that growth-management regulations increased median single-family home sale prices on a statewide level. This relationship becomes evident through summary data as well as more sophisticated statistical analysis that controls for factors such as changing household incomes, single-family home quality, and public policy. This should be of particular concern to policymakers and planners in Florida and elsewhere because the report found a disconnection between the goals of statewide growth-management laws that seek to ensure affordable housing for their residents and the effects of these growth-management policies when implemented. The results of the research suggest that some of the goals of Smart Growth advocates may be inconsistent with the realities of housing development. To the extent that more compact, higher-density urban development is encouraged through growth-management laws designed in ways similar to Florida's, higher housing prices could result. First, higher density urban areas are associated with higher housing prices as more people compete for an increasingly scarce resource: land. Second, by forcing development into existing urban areas, housing development will tend to take place in fast-growing areas, propelling consumers to bid up the price of land. These problems may be compounded by the very structure of Florida's GMA. While explicitly including goals to promote housing diversity and affordability, it imposes planning mandates that are likely to increase housing costs. Thus, there is a breach between planning goals and planning implementation. This is particularly notable in policies aimed at reducing sprawl. By encouraging higher-density development, urban planning is likely laying a foundation for increased housing prices unmatched by increases in incomes and other factors, resulting in deteriorating housing affordability. Florida's experience under the GMA demonstrates that strong growth-management laws that tie local planning to statewide goals run the risk of further politicizing the development process, increasing transaction costs, and creating an imbalance between housing supply and demand. This disequilibrium may exist in the aggregate as well as for specific types of housing, putting upward pressure on housing prices and, ultimately, reducing housing affordability. More on this and other issues can be found in Reason Foundation's recently released Annual Privatization Report 2008.

Candidates look for votes from Fannie and Freddie

anthony.randazzo@reason.org (Anthony Randazzo) — Mon, 08 Sep 2008 15:05:21 EDT

It might be too late for us to stop Rome from burning, but we can have an active role in how it is rebuilt. Like a raging fire, there is little chance we can quickly convince the federal government that nationalizing Freddie Mac and Fannie Mae will have significant long-term damage. However, the next administration and congress will have a lot to say in the future of the federal government's role as mortgage-lender. While the mortgage market's woes will never become the prevailing issue in the Presidential campaign, it is a significant concern and a part of the larger question on the economy. The philosophical preferences of each candidate are muddy, considering that election politics rarely mirror actual action. However, take it for what its worth, both Obama and McCain have issued statements on what they would do as President with the mortgage giants. According to Bloomberg:

"John McCain and Barack Obama agree the Treasury needed to step in to rescue Fannie Mae and Freddie Mac. They disagree over how much the U.S. government should be involved in the housing market once the immediate crisis is past.

Republican Senator McCain of Arizona wants the government to take over the two agencies, split them up, and then exit the mortgage-finance business by selling them off. Democratic Senator Obama of Illinois is suggesting a more lasting federal involvement."

According to Douglas Holtz-Eakin, McCain's economic adviser, McCain would get Fannie and Freddie "completely off the taxpayers' back," and he backs a proposal from Alan Greenspan that would break the companies up and sell the pieces off. Obama said a bit more cryptically this weekend, "We must ensure that any plan clarifies the true public and private status of our housing policies. We have to make clear that in our market system investors can't be allowed to believe that, unlike working families, they can simply invest in a 'heads they win, tails they don't lose' situation." In any case, as Bloomberg reporters Rich Miller and Matt Benjamin point out, whoever wins the presidential race will have to get a plan through a Democratic-controlled Congress that strongly supports Fannie Mae and Freddie Mac.