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| Posted: August 7th, 2014
A niche group of mortgage servicers known as nonbank specialty servicers has grown explosively over the past three years, triggering increased scrutiny by financial regulators. We explore the causes of this surge and the concerns it has generated in detail in our recently released commentary Nonbank Specialty Servicers: What's the Big Deal? and briefly in this post. Ultimately, we acknowledge the significance of the concerns, but caution regulators not to stifle these niche servicers, which are effectively addressing the unprecedented number of distressed loans still working their way through the mortgage system.
A niche group surges
Mortgage servicers perform all of the administrative work required once a borrower begins making monthly payments on a mortgage loan including receiving and processing the payment, maintaining accurate records on the mortgage, collecting and paying taxes and insurance as needed, and chasing down past due payments. Nonbank specialty servicers focus on troubled loans.
Ninety percent of mortgages are still serviced by commercial banks which are the traditional mortgage servicers. But the volume of loans managed by nonbank specialty servicers has grown in recent years at a remarkable rate—between 30 and 350 percent—while servicing by the largest bank servicers has stagnated or declined.
Three factors fueled this growth:
- Traditional servicers became overwhelmed by the volume of troubled loans and sold the servicing work of those loans to the nonbank specialists;
- Recognizing the increasing capacity of these servicers, regulators encouraged the banks to continue transferring the servicing work;
- Unrelated regulatory changes encouraged banks to reduce their servicing portfolios.
Regulators get nervous
As servicing volume has increased for specialty servicers, however, key regulators at the state and federal level have become increasingly nervous that these nonbanks are not regulated or supervised in the same way as banks.
What’s the big deal?
The concerns about these servicers come down to four main issues, each of which we explore in detail in our commentary:
- Capacity: Critics claim that recent increases in employee workload and the high number of offshore employees show that the industry has failed to develop an adequate infrastructure to keep up with its rapidly increasing portfolios.
- Service to borrowers: Critics claim that the data on consumer complaints, borrower outcomes, speed to resolution, and the number of loan modifications achieved show that servicers cannot transfer tens of thousands of troubled loans without interrupting service to distressed borrowers.
- Business affiliations: Several large specialty servicers have developed business affiliations with, and even acquired, companies handling loan resolution, including originators, securitizers, and foreclosure management firms. Servicers argue that this vertical alignment allows them to work more efficiently to resolve loans, but regulators are concerned that these affiliations may encourage self-dealing that is not in the best interests of borrowers.
- Financial risks and regulations: Ultimately, regulators need to resolve the question of how much regulation is appropriate for these nonbank servicers, since they face many of the same risks as traditional servicers (i.e. interest rate and prepayment risk) as well unique volatility and liquidity issues.
A call for balance
Industry participants and observers must continue to assess the available evidence to reach agreement on the standards to which we should hold these niche servicers. In the meantime, it’s critical that regulatory efforts strengthen and not inhibit this effective mechanism for addressing distressed loans.
Photo: Thousands of South Carolina homeowners seek free counseling during a three day event that started Friday March 13, 2009, in Columbia, S.C. The Neighborhood Assistance Corporation of America's "Save the Dream Tour" came to help people keep their homes by restructuring mortgages and permanently reducing the interest rates of at- risk homeowners.(AP Photo/Mary Ann Chastain)
Filed under: Agency securitization, Federal programs and policies, GSE reform, Homeownership, Housing and Housing Finance, Housing finance, Housing Finance Policy Center |Tags: delinquent, foreclosure, mortgage, servicer, Urban Institute Add a Comment »
| Posted: August 6th, 2014
What does it mean to grow up in instability?
Instability undermines the life chances of children in chronically disadvantaged communities—places where most residents are poor, services and schools are bad, amenities are few, and violence is endemic. In these communities, parents often cycle in and out of low-wage jobs, family members may cycle in and out of the household, and the family may move frequently in search of lower rents or safer neighborhoods.
Children growing up in these environments are likely to experience or witness violence, both in their communities and in their homes. And because of the stress of instability, their parents are more likely to have mental health challenges of their own and be less able to effectively shield their children from the constant strain.
Chronic instability can lead to toxic stress, which has been linked to a range of poor outcomes including learned helplessness (depression, feelings of lack of control) developmental delays, academic failure, and long-term mental and physical health problems.
Why housing assistance alone isn’t the solution
Public and assisted housing serves some of the poorest and most vulnerable households in the nation—families that are living in or at risk of instability. Many developments in central cities are located in racially and economically segregated communities and suffer all the worst ills of chronic disadvantage.
Housing Choice Vouchers allow recipients to use housing subsidies in the private market. While most participants end up in better housing and safer neighborhoods than their counterparts in traditional public housing, they still generally live in low-income, predominantly minority neighborhoods.
In theory, having housing assistance should help these families be more stable—and there is evidence that having a voucher dramatically reduces the risk of homelessness. But the reality is more complex. These families are still extremely poor and live in neighborhoods where children are exposed to violence and other risks. Housing assistance helps, but is not sufficient to protect children from the consequences of instability and toxic stress.
Current housing policies don’t always work as intended
Further, federal housing policy intended to address the problems of distressed public housing developments has actually created more instability for public housing residents.
HOPE VI and its successor, Choice Neighborhoods, provide funds for housing authorities to demolish their most distressed (deteriorated, high crime, and high poverty) developments and replace them with new, mixed-income housing. Other programs, such as HUD’s current Rental Assistance Demonstration, also provide opportunities for housing authorities to demolish and replace their worst properties.
While these efforts should eventually lead to improved housing and safer communities, current residents generally have to move—some of them several times— to make way for demolition and new construction. As bad as these developments generally are, involuntary relocation creates enormous stress and intense instability—disruptions to children’s education, loss of social supports, new financial challenges like dealing with utility payments, and a loss of supportive services.
Thoughtful relocation services and high-quality supports during and after relocation can help buffer some of these short-term stresses for families. Our research on the Chicago Family Case Management Demonstration showed the value of providing vulnerable public housing families facing relocation intensive case management, access to mental health services, and other services. These families not only ended up in better-quality housing in safer neighborhoods, but adults showed gains in employment and in mental and physical health.
A whole-family approach is necessary
But even these intensive services did not appear to be enough to protect children from the stresses of instability and relocation. Adolescents seemed to suffer the most, losing friends and social status and having conflicts with kids in their new communities. These findings led us to conclude that effectively buffering public housing children from the inherent instability of their environments as well as the extra effects of relocation requires a dual-generation, whole-family approach.
The multi-city HOST Demonstration is testing the effects of this intensive, two-generation model on outcomes for vulnerable families. HOST brings integrated services to these disadvantaged communities, helping both parents and children confront the challenges that lead to instability and stress. This model holds promise for helping to protect entire families from some of the most destructive effects of chronic instability.
For more on instability, read the paper and collection of essays that resulted from Urban's recent convening on instability.
Photo: In this photo taken March 16, 2011, Diane Link Wallace and her two daughters Janille Link, 18 and Diamond link, 11, stand outside their home in Chicago. Wallace says the lack of security, frequent floods and resulting mold finally pushed her and her asthmatic children out of the ABLA Homes public housing complex near downtown Chicago. After bouncing around different neighborhoods _ including one more dangerous than the projects she left behind _ she's settled in a place on the far South Side with a voucher. (AP Photo/M. Spencer Green)
Filed under: Adolescents and Youth, Arts and culture, Child care, Child support, Child welfare, Children, Children's health and development, Delinquency and crime, Economic well-being, Economic well-being, Families, Housing and Housing Finance, Low-income working families, Neighborhood indicators, Neighborhoods and community-building, Neighborhoods and youth, Neighborhoods, Cities, and Metros, Parenting, Prosocial behavior and volunteering |Tags: community, HOST, instability, neighborhood, poverty, Urban Institute 2 Comments »
and Elizabeth Oo Christina Plerhoples
| Posted: August 5th, 2014
Yesterday, Toledo turned its collective tap back on after a weekend filled with worries about toxic water supplies. The same day, less than an hour’s drive away, Detroit’s Water and Sewerage Department extended the moratorium on residential shutoffs that had left over 7,000 households without water up through mid-July. The timing of these incidents is a wakeup call not just for regional water utilities, but for city governments and residents.
Toledo’s water quality problem and Detroit’s water access crisis undermine the fundamental assumption that most contemporary urban Americans hold: that our water is safe, plentiful, and cheap. In actuality, water safety, supply, and cost in US cities have been the subject of years of intense management and regulation.
Yet, despite decades of public and private water infrastructure investments, our access is still not as safe and fair as we assume. According to the most recent American Housing Survey, over 8 percent of households still report that their primary source of water is not safe to drink.
The fundamental reality is that cities need water for basic consumption and sanitation. Keeping it flowing on involves three primary urban policy tools.
We need the appropriate infrastructure to deliver clean water to cities, and to remove waste and storm water efficiently and safely.
The contamination of Toledo’s water supply did not stem from an industrial spill or manufacturing emission—at least, not directly. The toxin was produced by algae that grow in phosphorus-rich water—a recent condition in western Lake Erie, thanks in large part to leaking septic systems, sewer emissions, and the chemical runoff from fertilized lawns, farms, and cattle feedlots that find their way into storm water drains and into the water source.
Nationally, our current water infrastructure is in a frightening state. In its latest report card, the American Society of Civil Engineers gave the country’s drinking water and storm water infrastructure a grade of “D.”
Pipes represent the greatest infrastructure need, with many in the United States over a century old, especially in the oldest and most populated cities. Over 240,000 water mains break every year in the United States—that’s 657 water main breaks per day.
Like delaying health treatments, waiting to resolve infrastructure problems only escalates the long-term costs. These expenses will trickle down to consumers who will face higher water bills and fees, as well as increasingly disrupted service, wasteful leakages, and localized floods.
States and local municipalities pay for the majority of water-related costs, and some, like Philadelphia, Milwaukee, and Austin, are adopting nontraditional water management. “Green” infrastructure, like roof planting and rain gardens, works with natural water flows and provides other environmental and social benefits, and can be cheaper than traditional “gray” infrastructure.
Green infrastructure is one of many long-term investment options for cities to address their aging infrastructure in the midst of severe resource constraints, increasing demand, and more physical pressure from changing environmental and climate conditions.
Cities and regions that identify future needs and plan accordingly face an obvious constraint—money, and not just for upfront construction costs. Long-term maintenance and operations are critical for repairing and replacing systems flexibly and with an eye towards improved—rather than just sustained—performance and equitable investment and returns across the population.
The costs of infrastructure have gone up since most of our communities’ systems were first installed. But cities can’t duct-tape their way out of these problems, and costs will only continue to rise if we postpone needed improvements. If we maintain the status quo, each US household will be paying $900 more each year by 2020 from increased water costs. These households could save $59 billion by then just with adequate water investments today.
But with local and regional resources strained and federal funds in limbo, the traditional paths to funding the upfront costs for new and repaired infrastructure are broken. Based on current investment trends, the funding gap for water and wastewater infrastructure will be $84 billion by 2020 and $144 billion by 2040.
In cities with declining populations like Detroit and Toledo, this doesn’t translate to having excess infrastructure—it means having unaffordable and decaying infrastructure. Downsizing isn’t an option—most urban infrastructure operates on a fixed grid, making it difficult to remove components in depopulated areas without impacting the whole system.
Many financing programs and tools do exist to assist communities in financing their water infrastructure, but the funding for daily operations, maintenance, and long-term capital investments for water systems are usually generated through low user fees, feeding the misperception that water infrastructure and supply is inexpensive.
Households that consume water need to pay their share, but they’re not the only users, nor are they always in a position to pay for this most basic of life’s necessities. Establishing affordable "lifeline rates" for low-income households and escalating rate plans for higher consumption are fair strategies that ensure revenue for utilities without jeopardizing life or health.
In order to maintain infrastructure and plan for future maintenance, the U.S. Environmental Protection Agency (EPA) argues that the pricing of water services should accurately reflect the true costs of providing high-quality water and wastewater services. Last month, the EPA launched the Green Infrastructure Collaborative, comprised of government agencies, nonprofits, and private organizations, to promote green infrastructure through grants and technical support.
Regulation and monitoring
Going back as far as 1948, the United States has heavily and successfully relied on regulation at the national and state levels to ensure that our waters continue to flow, and flow safely. With the passage of the 1972 Clean Water Act and 1987 Water Quality Act, water quality and access have certainly improved.
But with changing environmental conditions and increased growth, combined with reliance on the same original infrastructure, these gains may not persist. We need to continue investing in monitoring and enforcement of city waters beyond basic quality, and look toward effective guidelines and incentives that address water access, pricing, and conservation.
Ultimately, Toledo and Detroit’s water supply problems are symptomatic of a collective trend that also includes California’s ongoing drought and the physical backup of most major cities’ storm water systems. Cities need water, but we also need to learn how to manage it.
So far, the glass looks half full—but it’s emptying fast.
Photo: A sample glass of Lake Erie water is photographed near the City of Toledo water intake crib, Sunday, Aug. 3, 2014, in Lake Erie, about 2.5 miles off the shore of Curtice, Ohio. (AP Photo/Haraz N. Ghanbari)
Filed under: Cleveland, Detroit, Geographies, Housing and Housing Finance, Infrastructure, Metro, MI, Neighborhoods, Cities, and Metros, OH |Tags: Detroit, infrastructure, Toledo, Urban Institute, Water 2 Comments »
Molly M. Scott
| Posted: July 31st, 2014
Thanks to the release of Paul Ryan’s poverty plan, poverty’s back on the agenda again. Overall, that’s great news, but it’s important to think about what the long-term goal of this or any other anti-poverty plan might be.
What does “living in poverty” actually mean? All of our national poverty statistics reflect economic poverty. As such, they measure households’ total income, including earned income and transfer payments (such as SSI, disability, unemployment insurance, etc.) and benchmark these numbers against fixed income thresholds by household size.
When politicians talk about reducing poverty, they’re often talking about how get people to work more in order to minimize transfer payments and expenditures on safety net programs (i.e. SNAP, Housing Choice Voucher, etc.) that help the poor make ends meet. While this strategy may indeed reduce public spending on poor households, it may do little to make a difference in their lives.
The problem is that the arbitrary poverty line is a bad indicator of material poverty, the amount of hardship people experience meeting their basic needs. Families both above and below the poverty line have serious difficulty making it through each month and often have to make trade-offs among essentials like food, housing, health, and transportation. Often, the only differences between “poor” and “non-poor” families lie in the mix of resources they use and the costs associated with work.
Take one hypothetical example: Let’s say Family A and Family B-- both with a single mother and two elementary school-age children-- live next to each other in identical apartments in Washington, DC. Both mothers have less than a high school education and earn only the minimum wage of $9.50 an hour.
These two seemingly identical families cobble together roughly the same amount of resources to get them through the month. Family A pieces things together with 20 hours of employment, SNAP benefits, and a Housing Choice Voucher that covers most of the rent. Family B pays the bills by working 60 hours a week and receiving a more modest SNAP benefit.
In terms of economic poverty, Family B is much better off, registering an annual income nearly $20,000 greater than Family A, and about $10,000 above the federal poverty line of $19,790. Family A, in contrast, lives at less than 50 percent below the federal poverty line. However, at the end of the month, Family B is struggling just as much, if not more, than Family A. How can that be?
The biggest differences lie in monthly expenses. While the cost of rent and food is exactly the same, the mother in Family B can’t work just during school hours and has to pay for child care for her two children. In addition, she has to pay a lot more for transportation just to get to and from work every day. In all practicality, that means the mom in Family B would be immediately facing some hard decisions. She’d have to consider moving to smaller or lower quality housing, leaving her children home alone some of the time while she works, and/or frequenting her local food pantry.
True, Family B is not economically “poor” and costs the federal government less money. But is that what we should be aiming for?
If we really want to address poverty, we need to make sure our policies and programs do more than swap out subsidies for low-income wages that won’t change people’s quality of life. Struggling families-- both “poor” and “non-poor”-- need real ladders of opportunity and supports along the way.
Filed under: Adolescents and Youth, Child care, Child support, Child welfare, Children, Economic Growth and Productivity, Economic well-being, Economic well-being, Economic well-being, Employment and income data, Families, Family and household data, Finance, Income and Wealth, Job Market and Labor Force, Labor force, Low-income working families, Low-wage workers, Mobility, Parenting, Poverty, Poverty, Vulnerability, and the Safety Net, Single-family finance, Social Security, Supplemental Nutrition Assistance Program (SNAP), Supplemental Nutrition–Women, Infants, and Children (WIC), Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), Unemployment insurance, Wages and nonwage compensation, Wages and nonwage compensation, Welfare and safety net programs, Work-family balance |Tags: economics, economy, families, income, mobility, poverty, Urban Institute 5 Comments »
Sam Bieler Darakshan Raja
| Posted: July 30th, 2014
Today, members of the Senate Judiciary Committee will meet to discuss how the Violence Against Women Act (VAWA) can protect victims of domestic abuse from gun violence. Developing and funding research on effective interventions and policies is essential to moving this conversation beyond rhetoric and into effective action.
What we know about domestic violence and homicide in the United States
Women are much more likely than men to be the victims of domestic violence homicide. Forty percent of female homicide victims were killed by a current or former intimate partner in 2005, compared with just 2 percent of male homicide victims. Nationally, domestic homicides take the lives of approximately three women each day.
The presence of firearms elevates the risk. Firearms are used in two-thirds of all domestic homicides, and female victims of domestic violence are five times more likely to be killed by their abuser if that abuser has access to a gun.
What makes domestic homicides even more tragic is that they are often preventable. One study in North Carolina found that at least 67 percent of domestic homicides were preceded by domestic violence, and in 2011, 61 percent of serious domestic violence incidents were reported to the police.
What can we do to stop the violence?
Clearly, police are encountering a number of incidents that may later escalate into homicide. Equipping law enforcement with tools like the Danger Assessment, which has a strong track record of identifying potential domestic homicide victims, offers an opportunity to intervene before abuse becomes homicide. How we intervene, however, is a more challenging question.
We have limited evidence on what laws and policies prevent domestic gun violence. States have experimented with a wide array of policies and programs to prevent domestic homicides, but we still don’t know what works. That’s where research needs to come in.
Eighteen states have laws authorizing police to remove firearms from a home if they respond to a domestic violence incident. Twenty states have laws authorizing courts to remove firearms from a home as part of a restraining order. But these laws vary significantly across states in the authority they give courts and law enforcement to restrict abusers’ access to weapons. A closer look at what policies and practices are most effective could provide insights that we could apply nationwide, but no one is doing that research.
Why research matters
Sometimes, what feels like an obvious solution just doesn’t work in practice. Domestic abuse in particular is an area in which both conventional wisdom and status quo have proven glaringly inadequate. For instance, most domestic batterer programs have been found to have no effect on offenders’ behavior, and mandatory arrest policies for abusers, once thought to be a sound strategy for protecting victims, have been found to actually increase the risk of domestic homicide.
Initial work has found that while laws restricting firearms from individuals under court order reduce homicide, laws that require the confiscation of firearms by police responding to a domestic abuse incident have no effect. But what we don’t know is how these laws are executed—whether or how often police actually enforce these laws. Without this basic data, we can’t tell if the laws are ineffective or whether they are just being implemented poorly, a crucial insight for devising new strategies to protect victims.
If research finds that these policies, when well implemented, can prevent domestic gun homicides, more states should adopt these strategies and VAWA should be modified to encourage them to do so. Strengthening enforcement of protection orders for domestic violence cases and empowering victims to hold law enforcement accountable if agencies don’t adequately respond could be another avenue if research shows such tactics are effective.
Today’s hearing on the VAWA and the role of guns in domestic homicides presents a perfect opportunity for policymakers to support more efforts to document what works to protect victims from gun violence and to translate that knowledge into action.
Photo: Domestic violence advocate Kimberly Brusk, left, speaks with Beth Stubbings during a gun control rally as part of the "No More Names: National Drive to Reduce Gun Violence," a 25-state national bus tour, at the Georgia State Capitol, Monday, June 24, 2013, in Atlanta. Families of gun violence victims, gun owners, elected officials, faith leaders and advocates voiced their support for comprehensive background checks. (AP Photo/Jaime Henry-White)
Filed under: Crime and Justice, Crime and justice statistics, Families, Family structure, Family violence, Justice Policy Center, Policing and crime prevention, Policy Centers, Victims of crime |Tags: gun, homicide, Senate, Urban Institute, VAWA, violence, women 1 Comment »
| Posted: July 28th, 2014
Detroit’s municipal employees and retirees made headlines last week when they accepted a pension cut to help reduce the city’s debt. Is this agreement a game-changer, as some contend? Now that some retirees have agreed to forgo already earned pension benefits—once considered sacrosanct—will unions across the country follow suit? Don’t count on it.
Many state and local employees and retirees have already shouldered significant pension cuts, and it’s unrealistic to expect them to absorb any more. Rather than relying on givebacks from public servants, policymakers must commit themselves to paying the benefits they promised.
Like most public-sector employees, city workers in Detroit who spent their entire careers on the city’s payroll receive generous pensions. Benefits equal a fraction of employees’ final average salaries multiplied by years of service. Before the city’s finances collapsed, that fraction rose over employees’ careers, reaching 2.2 percent of salary after 25 years on the job. Employees with 30 years of service could retire as early as age 55. Once retired, their benefits automatically rose 2.25 percent a year.
Over a lifetime, these benefits add up. Consider a Detroit municipal employee making $50,000 a year. Under the old rules, after 30 years on the job, he could retire at the age of 55 with an initial pension of $27,500, worth more than half a million dollars over his lifetime (assuming a 2 percent real interest rate and 3 percent inflation).
As the city prepares to enter bankruptcy, however, that pension has been slashed. First, the city cut the benefit-formula multiplier for years worked after 2011 to just 1.5 percent. That change trimmed lifetime benefits for newly hired city workers by about a fifth. Last week’s agreement further reduces annual benefits by 4.5 percent and eliminates the automatic benefit escalator in retirement, reducing lifetime benefits for new retirees by another quarter. New hires who eventually retire at age 55 after 30 years of service will receive pensions worth 40 percent less, in inflation-adjusted dollars, than their counterparts who retired in 2011.
New Jersey employees have already taken on the burden of benefit cuts
These cuts may help get Detroit back on its feet, but don’t expect similar retiree givebacks elsewhere to solve the nation’s public pension problem. Many state and local retirement plans have already substantially cut benefits. Most of the benefit formula changes apply only to new hires, but current workers and retirees have not been spared.
As the Center for Retirement Research points out, between 2010 and 2013, 12 states reduced or eliminated cost-of-living adjustments for current retirees as well as current employees and new hires. (Another five states reduced COLAs but shielded current retirees). Many jurisdictions have also raised the amount employees must contribute to their plans.
New Jersey, with some of the worst-funded plans in the nation, is a good example. In 2011, lawmakers eliminated COLAs for state retirees, whose benefits had increased each year by 60 percent of the change in the consumer price index. That cut shaved 25 percent off the lifetime pension of a newly retired state employee with 35 years of service. The state also increased mandatory employee contributions from 5.5 to 7.5 percent of pay, reducing what retirees get from the state by another eighth. Additionally, the 2011 reforms boosted the retirement age and reduced the plan multiplier.
All told, New Jersey state retirees will receive pensions only two-fifths as large as what they would have been paid under the rules in effect before 2008. Yet, New Jersey’s pension plan is in worse financial shape today than it was in 2007. Because of these benefit cuts, state employees hired at age 25 must now work 28 years before their future payments are worth more than the value of their required plan contributions. Those who leave state employment earlier end up financing their entire pensions themselves, without any state contributions. In fact, they would be better off if they could opt out of the state retirement plan and invest their required contributions elsewhere.
States should fully fund their retirement promises
Most troubled public pensions are financially distressed because states and localities have not contributed as much as their actuaries say they must in order to pay the future benefits they’ve promised, not because their benefits are too generous. Our recent comprehensive analysis of state plans graded many plans poorly because they failed to provide employees with adequate retirement security, especially those who spent less than a full career in public service. If policymakers want to fix the public pension mess, they must dedicate themselves to fully funding the retirement promises they’ve already made.
Shirley Lightsey, president, Detroit Retired City Employees Association, stands front of part of Diego Rivera's Detroit Industry mural after a news conference at the Detroit Institute of Arts in Detroit, Monday, June 9, 2014. (AP Photo/Paul Sancya)
Filed under: Aging, Detroit, Economic well-being, Geographies, Income and Benefits Policy Center, Income and Wealth, Labor force, Metro, NJ, Retirement, Retirement/pensions, Social Security |Tags: bankruptcy, Detroit, New Jersey, pensions, retirement, Urban Institute Add a Comment »
| Posted: July 25th, 2014
American Banker recently called for a data-driven analysis of the economic impacts of the Dodd-Frank Act and related regulations. We welcome the call for an empirical assessment of regulatory impact. At the same time, we caution against the belief that a single number or set of numbers can quantify the impact of a complicated law on a complex system.
Since the Housing Finance Policy Center’s inception last October, we’ve made it our primary focus to dive deeply into the data to better understand the interplay of market forces, regulations, laws and other factors. To note a few recent examples:
This work has reminded us that assessing impact is extremely difficult, turning on a mix of factors that is often hard, indeed occasionally impossible, to disentangle.
Take all those missing loans, for example. Our work indicates that they are the result of a mix of factors that are difficult to isolate, including the overcorrection of institutions understandably nervous about risk coming out of the crisis and a similar overcorrection by agencies trying to recover the losses they suffered from bad underwriting and to protect against similar practices going forward. How much of it is one, how much the other, how much something else entirely? It’s literally impossible to say.
Interestingly, though, the two factors most commonly blamed, Dodd-Frank and Basel III, cannot be responsible for the 2012 results, which predate implementation of both.
And what about QM, where the impact of Dodd-Frank should be clear? So far, we have not found any impact at all. Part of this may be limited access to data (at least until the 2014 Home Mortgage Disclosure Act data comes out in late 2015) about loans made by smaller lenders and held in portfolio. And of course, it’s always hard to prove why something isn’t happening.
But we suspect that the real reason we can’t see QM impact may be that the current credit box is already extremely tight. So tight that the QM rules are not making it any tighter. A major challenge in figuring out the ultimate impact of QM will be to make some judgment about what the credit box “should” have looked like in January 2014, before the rules took effect. We’ll try, but we’re sure our answer will only be one of many.
The positive impact of some regulations shouldn’t be overlooked either. Last week, we published our analysis of FHA and VA lending, demonstrating that additional regulation applicable to VA loans—the residual income test— was the most likely cause of VA lending consistently performing better than FHA lending, notwithstanding VA loans’ higher LTVs and lower credit scores.
So how does one measure the positive impact of rules like those in Dodd-Frank against whatever costs are found, particularly where the positive impacts are likely years out and potentially even more difficult to quantify than the costs? Indeed, how do you assess the positive impact that Dodd-Frank rules will have on increased financial stability and consumer safety in a system whose collapse recently cost the world’s economy trillions of dollars?
While we applaud the call for more and better analysis, we recommend humility in the face of complexity and perhaps a healthy dose of skepticism, especially about results in the form “the regulations cost consumers—or businesses—‘X’ dollars a year.” As the problems these rules are intended to address don’t lend themselves to simple solutions, the rules’ impact on our complex economy is not likely to be easy to discern.
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Photo: Chris Dodd and Barney Frank during the Dodd-Frank during the Dodd-Frank Wall Street Reform and Consumer Protection signing ceremony. (AP Photo/Charles Dharapak, File)
Filed under: Federal programs and policies, GSE reform, Housing and Housing Finance, Housing and the economy, Housing Finance Policy Center |Tags: benefits, costs, Dodd-Frank, evaluation, housing finance, Urban Institute Add a Comment »
and Laurie Goodman Jim Parrott
| Posted: July 24th, 2014
As part of their $25 billion settlement in 2012 of lending abuse claims, five of the nation’s largest banks agreed to modify mortgages for borrowers struggling to make their original monthly payments. To the consternation of many investors, the settling banks were given credit not only for modifying loans that they held in their own portfolios, but also for modifying loans that they serviced but that were actually owned by investors.
In June 2014, the Association of Mortgage Investors (AMI) appealed to Attorney General Eric Holder to eliminate investor’s loans from future settlements.
While there is considerable merit to investors’ concerns, AMI’s solution goes too far.
How much of the settlement was paid with “other people’s money”?
That depends on the bank. Earlier this year, in our commentary about the $25 billion national mortgage settlement, we found that while none of Wells Fargo’s or Citi’s credits came from investor-owned loans, Bank of America and JP Morgan Chase used a significant number of investor-owned loans. The settlement does not disclose, however, exactly how many loans were modified, and to what extent.
In this national settlement and more recent settlements between JP Morgan Chase and the Justice Department and Citi and the Justice Department, banks received about half the credit for modifying with investor-owned loans than the loans in their own portfolio.
Why do investors care?
In theory, investors should be pleased if their loans are modified. Each settlement agreement provides that the expected value of the modified loan should be greater than the expected value of the current, unmodified loan—or net present value (NPV) positive. But in reality, investors are deeply suspicious about the accuracy of the NPV models used in these settlements, and question whether the modified loans are actually more valuable than they would have been if left alone.
A modified loan that is worth more than the original may seem counter-intuitive, but the increase in value comes from the borrower’s increased likelihood of paying off the loan once modified—supposedly a win-win-win, with benefits to the investors, the settling servicers, and the borrowers.
Investors argue, however, that the banks should be doing NPV positive modifications as a best practice regardless and shouldn’t get settlement credit. A similar argument applies to portfolio loans, but the settlements strongly suggest that the business imperative isn’t powerful enough.
Eliminating investor loans in settlements is too far.
While we sympathize with AMI’s concerns, legitimate NPV positive modifications accrue significant benefits to all of the involved parties and help ease the debt overhang that still troubles the recovery. Rather than abandoning the opportunity to modify the large number of troubled loans that happened to fall into MBS pools, it would be more sensible to provide safeguards to ensure that the NPV calculations are legitimate and place limitations on the amount of investor funds that can be used.
Greater clarity and transparency is better.
Settlements should continue to include investor loans, but should adopt three conditions:
- Clarify limits. The settlement should stipulate up front the maximum percentage of consumer relief that can be granted with investor funds. The percent should be made public prior to finalizing the settlement, so investor objections can be considered.
- Clarify method. Similarly, the method used to calculate the NPV and the re-default rates should be made public prior to finalizing the settlement, so that investor objections can be considered.
- Require disclosure. Servicers should be required to disclose to settlement monitors the individual loan NPV calculations in their reports, and settlement monitors should be required to disclose those calculations to the public, to the maximum extent possible consistent with privacy concerns. This can certainly be done by aggregating small groups of loans in a specific private label security.
While investors are right to be concerned about both how much of their assets are being written down in these settlements and the way in which they are being written down, the best solution isn’t to ban modifications of their loans. Rather, the Justice Department, state attorneys general and other settling parties should set limits on the use of these loans and ensure that the NPV tests are transparent and public.
Photo: Attorney General Eric Holder on July 14, 2014 announces a $7 billion settlement with Citigroup related to risky subprime mortgages. (AP Photo/Pablo Martinez Monsivais)
Filed under: Federal programs and policies, GSE reform, Housing and Housing Finance, Housing and the economy, Housing finance, Housing Finance Policy Center |Tags: banks, foreclosures, GSE, housing finance, reform, Urban Institute 2 Comments »
| Posted: July 24th, 2014
Last Tuesday saw the release of Housing Security in the Washington Region, a study I wrote with my colleagues at the Urban Institute with assistance from the Metropolitan Washington Council of Governments.
The study is unique for its breadth, spanning Washington, DC and 11 surrounding jurisdictions in Maryland and Virginia. It’s also thematically expansive, examining the full continuum of housing needs, from emergency shelter to affordable homeownership, highlighting how supply, demand, funding streams, and policies impact homeowners, renters, and the unhoused at every income level.
In a study of this size, it’s easy to lose sight of what all these numbers mean for real people. Let’s unpack a small portion of the study.
Rental housing affordability is a big problem in the area. Nearly half of all renters (regardless of income level) in the Washington region were cost burdened in 2009-11. That means almost 315,000 households were paying more than 30 percent of their monthly income on rent and utilities. To give you a sense of the magnitude of the problem, there were about 300,000 households total in Prince George’s County, Maryland.
Of course, households at the bottom of the income scale were most likely to be cost burdened. In fact, 86 percent of extremely low income households—those earning less than $32,000 annually—were cost burdened in 2009-11. Keep in mind that many of the services that get you through your week are performed by workers who would fall into the “extremely low income” category—maids, drycleaning workers, pharmacy aides, fast food cooks, coffee shop cashiers, and nursing aides and orderlies, to name a few.
Take, for example, a nursing aide (who may just be caring for a loved one right now). On average, an aide in the DC metro area earns $28,700. Imagine that the nursing aide has two children and needs a two-bedroom apartment. If we think that she could afford to pay 30 percent of her income in rent, then she could afford a utilities-included apartment that rents for $720. (By the way, that only leaves her with $20,000 to pay for food for a family of three; clothing, including her scrubs for work; transportation to get to work; health insurance; emergencies; etc.)
As you can see in the chart above, it’s no surprise that our nursing aide might be cost burdened—there is not one jurisdiction in the area that she could afford to live in if she paid the DC metro area’s median rent of $1,320. At that level, our nursing aide would have to work the equivalent of 1.83 jobs to afford to rent such an apartment and not be cost burdened. In Virginia’s Arlington and Fairfax Counties, she would have to work more than two full-time jobs.
Our study concludes that every jurisdiction in the Washington region needs more units to meet the needs of renters like our nursing aide—94,200 units in total. Policymakers, local agency staff, and philanthropists can use this data on gaps in the housing supply to inform their work and make strategic investments to aid those struggling with high rents.
This study was commissioned by The Community Foundation for the National Capital Region, with generous support from The Morris and Gwendolyn Cafritz Foundation.
Filed under: Affordability, Affordable housing, Economic Growth and Productivity, Geographies, Housing and Housing Finance, Housing and the economy, Income and Wealth, Job Market and Labor Force, Labor force, Low-wage workers, Metro, Metropolitan Housing and Communities Policy Center, Multifamily housing, Neighborhoods, Cities, and Metros, Wages and nonwage compensation, Wages and nonwage compensation, Washington DC, Washington, D.C |Tags: affordable, D.C., housing, nurse, poverty, rental, Urban Institute, Washington 1 Comment »