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A Washington View on the Year Ahead Professor Peter Swire Ohio State University Formerly, Special Assistant to the President for Economic Policy Zelman.

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Presentation on theme: "A Washington View on the Year Ahead Professor Peter Swire Ohio State University Formerly, Special Assistant to the President for Economic Policy Zelman."— Presentation transcript:

1 A Washington View on the Year Ahead Professor Peter Swire Ohio State University Formerly, Special Assistant to the President for Economic Policy Zelman Distressed Housing Forum December 10, 2010

2 Overview Foreclosure-gate: the back office & the UCC Foreclosure-gate: the back office & the UCC Robo-signing opens the door politically to reform of MSRs Robo-signing opens the door politically to reform of MSRs Has D.C. fallen out of love with homeownership? Has D.C. fallen out of love with homeownership? Mortgage interest deduction Mortgage interest deduction GSEs have subsidized lower mortgage rates GSEs have subsidized lower mortgage rates New political climate creates risk for the traditional support for homeownership New political climate creates risk for the traditional support for homeownership Summary on next year in Congress Summary on next year in Congress Disclaimer: left White House in August. My current assessment here, not confidential government information. Disclaimer: left White House in August. My current assessment here, not confidential government information.

3 Foreclosure-gate & the Back Office What we saw in the S&L crisis What we saw in the S&L crisis During the bubble, little attention in general to paperworkDuring the bubble, little attention in general to paperwork Some fraud, as in KeatingSome fraud, as in Keating Widespread lack of documentationWidespread lack of documentation Back office of servicers and others in mortgage chain? Back office of servicers and others in mortgage chain? Servicing in this decade a low-margin businessServicing in this decade a low-margin business Available funds were spent on phone calls etc. to collect paymentsAvailable funds were spent on phone calls etc. to collect payments How much spent on assuring excellent back-office practices?How much spent on assuring excellent back-office practices? How many of the relevant players are bankrupt or merged, so tracing paperwork is harder?How many of the relevant players are bankrupt or merged, so tracing paperwork is harder?

4 Foreclosuregate & the UCC Fact: key law professors expert in the Uniform Commercial Code believe that foreclosure-gate is worse than the market is betting Fact: key law professors expert in the Uniform Commercial Code believe that foreclosure-gate is worse than the market is betting Favorite current legal theory: the notes were not properly transferred to the trust; the transfers were thus void; the trust thus has no assets. If correct: Favorite current legal theory: the notes were not properly transferred to the trust; the transfers were thus void; the trust thus has no assets. If correct: Defense for homeowners against foreclosure Defense for homeowners against foreclosure MBIA and others have strong claims MBIA and others have strong claims MBS investor suits waiting in the wings MBS investor suits waiting in the wings Response is that form will not triumph over substance – judges wont give homeowners a free ride to stay in the home Response is that form will not triumph over substance – judges wont give homeowners a free ride to stay in the home Key variable – in decentralized court system, what fraction of judges will stick with formalities vs. let banks foreclose? Key variable – in decentralized court system, what fraction of judges will stick with formalities vs. let banks foreclose?

5 From Robo-signing to MSR Reform Fact 1: robo-signing and failure to get papers notarized are specific operational failures in mortgage servicing; Fact 1: robo-signing and failure to get papers notarized are specific operational failures in mortgage servicing; Fact 2: Congress and the regulators have now begun to look under the hood of mortgage servicing generally Fact 2: Congress and the regulators have now begun to look under the hood of mortgage servicing generally Sheila Bair (FDIC) this month called for broad based reform of mortgage servicing to address misaligned incentives; Sheila Bair (FDIC) this month called for broad based reform of mortgage servicing to address misaligned incentives; Dan Tarullo (Fed) called for new national standards for servicers; these may be done through Consumer Financial Protection Bureau Dan Tarullo (Fed) called for new national standards for servicers; these may be done through Consumer Financial Protection Bureau The saying that theres no such thing as bad publicity may be wrong here The saying that theres no such thing as bad publicity may be wrong here One possibility – with new spotlight on mortgage servicing, and huge challenges to passing general GSE reform, a reform package on mortgage servicing could come first One possibility – with new spotlight on mortgage servicing, and huge challenges to passing general GSE reform, a reform package on mortgage servicing could come first Bair has often been a leading indicator of regulatory change Bair has often been a leading indicator of regulatory change

6 MSR Reform Misaligned incentives – investors, GSEs, FHA, consumers all concerned that current servicing structure not working well for them Misaligned incentives – investors, GSEs, FHA, consumers all concerned that current servicing structure not working well for them Servicers not thrilled either, with high costs and looming capital rule changes Servicers not thrilled either, with high costs and looming capital rule changes The Feds testimony for national standards for servicers invites comparison to consumer protections of Fair Credit Reporting Act The Feds testimony for national standards for servicers invites comparison to consumer protections of Fair Credit Reporting Act Spotlight on servicing companies (MSRs; credit reporting agencies) Spotlight on servicing companies (MSRs; credit reporting agencies) Their clients are major corporations (investors in MBS; lenders) Their clients are major corporations (investors in MBS; lenders) Consumers are not the customers, but can suffer serious harm (lack of a mod/high fees/etc.; incorrect credit history) Consumers are not the customers, but can suffer serious harm (lack of a mod/high fees/etc.; incorrect credit history) Conclusion – possibility that reform of MSRs could be down payment on housing finance reform, in Congress or by reg: Conclusion – possibility that reform of MSRs could be down payment on housing finance reform, in Congress or by reg: Logically, hard to do new forms of securitization until know how to service the loans Logically, hard to do new forms of securitization until know how to service the loans Hard to do full GSE reform soon, so do this piece first? Hard to do full GSE reform soon, so do this piece first?

7 Has D.C. Fallen Out of Love with Homeownership? Previously, a loving relationship Previously, a loving relationship Republicans praised the ownership society and often allied with builders and developers Republicans praised the ownership society and often allied with builders and developers Democrats supported expanding the range of families who could own homes, seeing a home as the pathway to the middle class Democrats supported expanding the range of families who could own homes, seeing a home as the pathway to the middle class What might be causing a break-up? What might be causing a break-up? From fifty years of faithful rises in housing prices to betrayal and price falls From fifty years of faithful rises in housing prices to betrayal and price falls A couple of hundred of billions of dollars lost can ruin a good relationship – GSEs, FTHBC, and other housing support cost a lot A couple of hundred of billions of dollars lost can ruin a good relationship – GSEs, FTHBC, and other housing support cost a lot Democrats angry at abuses in subprime Democrats angry at abuses in subprime Republicans (and everyone else) mad at the bailouts Republicans (and everyone else) mad at the bailouts Consensus that the current relationship simply cant last Consensus that the current relationship simply cant last

8 Hit the Housing Subsidies? Mortgage interest deduction on the table Mortgage interest deduction on the table Bowles-Simpson Commission recommends cutting, for deficit reduction of >$100 billion/year Bowles-Simpson Commission recommends cutting, for deficit reduction of >$100 billion/year Critiques of current deduction Critiques of current deduction Encourages too much house per familyEncourages too much house per family Question whether housing sector deserves subsidy vs. manufacturing & other sectorsQuestion whether housing sector deserves subsidy vs. manufacturing & other sectors Regressive – bigger benefits for upper-income families in larger housesRegressive – bigger benefits for upper-income families in larger houses Second liens especially under scrutiny because of the problems revealed since the crisis hit – do first lien investors want government subsidies for seconds?Second liens especially under scrutiny because of the problems revealed since the crisis hit – do first lien investors want government subsidies for seconds? Historically, the deduction untouchable, but … Historically, the deduction untouchable, but …

9 Hit the Housing Subsidies? (part 2) Implicit (now explicit) guarantees for Fannie/Freddie have reduced mortgage rates by about 25 bp Implicit (now explicit) guarantees for Fannie/Freddie have reduced mortgage rates by about 25 bp That was approximate advantage of F/F over major banks pre- crisis That was approximate advantage of F/F over major banks pre- crisis Many doubt whether new housing finance system, whenever it passes, will have this goal of reducing mortgage rates Many doubt whether new housing finance system, whenever it passes, will have this goal of reducing mortgage rates More focus on tail risk – role of the guarantees in providing support in a crisis, not during normal timesMore focus on tail risk – role of the guarantees in providing support in a crisis, not during normal times Cut in subsidies would likely mean a one-time hit to housing market Cut in subsidies would likely mean a one-time hit to housing market If $10 out of $100 is subsidy, new price at $90 (not actual estimate) If $10 out of $100 is subsidy, new price at $90 (not actual estimate) Prices have bounced so much that the one-time hit may not be as visible as usual vs. risky to take the hit when so many are underwater Prices have bounced so much that the one-time hit may not be as visible as usual vs. risky to take the hit when so many are underwater History of D President and R Congress cutting deficit History of D President and R Congress cutting deficit

10 Republicans in Congress Tea Party – end subsidies, spending, and bailouts Tea Party – end subsidies, spending, and bailouts Housing subsidies can be cutHousing subsidies can be cut Allies with home builders, realtors, etc. Allies with home builders, realtors, etc. Traditional support for development and home buildingTraditional support for development and home building But, harder now to support bailouts and subsidiesBut, harder now to support bailouts and subsidies Allies with banks Allies with banks Ten years ago, the banks lobbied hard against the GSEs, seeking bigger market share in origination and securitizationTen years ago, the banks lobbied hard against the GSEs, seeking bigger market share in origination and securitization That position would mean cutting the GSE subsidy and minimizing any guarantee That position would mean cutting the GSE subsidy and minimizing any guarantee Today, less clear how to do securitization without explicit government guaranteeToday, less clear how to do securitization without explicit government guarantee So, more support for a modified version of GSE guarantee So, more support for a modified version of GSE guarantee Banks are long on the housing market, so big one-time hit, such as cut in subsidy, is a risk for themBanks are long on the housing market, so big one-time hit, such as cut in subsidy, is a risk for them

11 Conclusion: Next Year in Congress Administration has promised legislative proposal for GSE reform in 2011 Q1. Administration has promised legislative proposal for GSE reform in 2011 Q1. Few think the big GSE package can move forward in this Congress Few think the big GSE package can move forward in this Congress Rs see GSE as political wedge issue: bailouts, welfare, socialismRs see GSE as political wedge issue: bailouts, welfare, socialism Ds want to preserve affordable housing, but that has become a flashpoint for controversy; fairness to multifamily as one possible new message for what a balanced housing policy would look likeDs want to preserve affordable housing, but that has become a flashpoint for controversy; fairness to multifamily as one possible new message for what a balanced housing policy would look like Temptation to do something could lead to MSR or other piecemeal reform, or regs as the Fed seems to contemplate Temptation to do something could lead to MSR or other piecemeal reform, or regs as the Fed seems to contemplate But the default setting for the next two years is gridlock in Congress – change, to the extent it happens, will come elsewhere But the default setting for the next two years is gridlock in Congress – change, to the extent it happens, will come elsewhere


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