Laurie Goodman is Director of the Housing Finance Policy Center at Urban Institute, an organization that drives policy change at the nation’s highest housing agencies with solid research and data.
Tell us a little about Urban Institute’s Housing Finance Policy Center and its mission.
Regulators and other policymakers are making critical decisions each day, and they need information, evidence-based analysis, and solutions.
The Housing Finance Policy Center at Urban Institute was created to fill this need. We provide timely, impartial data and analysis on housing finance and contribute to sound public policy, efficient markets, and economic opportunity.
You have quite an impressive résumé. You were the head of global fixed income research at UBS, a senior economist at the Federal Reserve Bank of New York, and you were even inducted into the Fixed Income Analysts Hall of Fame. What led you to join Urban Institute?
I spent almost 30 years on Wall Street, and I wanted a change. I had developed a deep interest in public policy issues, and specifically public policy toward housing and housing finance. I was looking for a platform to continue this research. Urban was thinking of setting up a Housing Finance Policy Center. I heard about the center, and stuck my hand up to run it.
What are some of your core objectives in this role?
So much of public policy seems to be dominated by political ideology, and not grounded in data. Our primary goal was to provide data driven analysis of public policy issues to regulators and other policy makers that they could count on for relevance, accuracy, independence, timeliness and accessibility.
We do this through a vast array of written products including research papers, issue briefs, blogs and presentations. Secondarily, we hoped to serve as a hub for informed dialogue among policy makers, practitioners, advocates, academics, and other researchers, through convening of all types: data talks, seminars, symposiums.
Urban Institute is all about driving policy with data, not ideology. Name one or two of the biggest changes you would make to current housing finance policy based strictly on available data?
The data is clear that, in response to the housing crisis, we’ve overcorrected and it’s too hard to obtain a mortgage these days. It is now extremely difficult for all but those with nearly pristine credit to obtain mortgages.
There is no single silver bullet but regulators and lawmakers need to take the actions we’ve outlined to ease access to credit. Specifically, providing greater clarity about when loans can be put back on lenders and reducing the costs and burdens of servicing delinquent loans, particularly FHA loans would go a long way. FHA must also deal with lenders fears about being sued used under the False Claims Act.
What’s the biggest concern regarding housing finance policy in the next five to ten years? Why should future home buyers care about these issues?
First, that the GSEs are still in limbo. The Federal Housing Finance Agency, first under Ed DeMarco and now under Mel Watt has done a great deal to move the organizations forward. They have introduced and expanded risk sharing deals to reduce the risk to the taxpayer. They are developing a Common Securitization Platform. They have moved to expand credit availability.
However, the ownership issues can only be decided by congress. One thing is clear: the mix of public support and private ownership was in large part responsible for their poor performance during the crises, and there is no easy resolution. The danger is if we don’t deal with this, and leave the GSEs in limbo, with little capital, it is hard to see how they would react to a future downturn in the housing market. And we are too reliant on them not to clarify this.
Second, over the next 15 years the homeownership rate will continue to decline in the United States and the demand for rental housing will dramatically increase in many communities.
We must at least double the current annual production of multifamily units to keep up with this demand. At the same time, if we don’t identify viable ways to ensure that more of these units are affordable, there will be an unprecedented and pervasive increase in the number of families that pay more than half of their income for rent.
You recently submitted a proposal to FHA highlighting possible lender pullback due to FHA’s severe penalties for underwriting mistakes. Why should home buyers be concerned with FHA’s rules for lenders? What were your proposed solutions?
The FHA serves first-time homebuyers, and many low-income and minority homebuyers. First-time homebuyers need to come into the market for existing homebuyers to be able to sell their homes and move on to their next home. When FHA policies restrict credit or make it more expensive for FHA borrowers, more than just FHA borrowers are impacted. Likewise, when entire swaths of the population – like minority groups or low-income families – find it hard to borrower money to buy a home, the many benefits of homeownership are disproportionately denied that group.
FHA has made some strides to deal with these issues. In particular, they have aggregated their 900 mortgagee letters (these mortgagee letters are the way they communicate program changes with lenders) into a single handbook that lenders can reference. They have recently finalized a Supplemental Performance Metric, which allows FHA to consider the mix of borrower credit scores when looking at lender performance.
Prior to this, lenders were compared against each other through the Compare Ratio. Those lenders with only pristine borrowers inevitably looked better, and lenders were penalized if they were more than twice the average. We had recommended some changes to the FHA’s initial proposal on the Supplemental Performance ratio; they took our suggestions.
FHA has also done a taxonomy, in which they had classified origination errors into four severity buckets. We would like to see specific remedies attached to each bucket. So if the error is minor, and the loan would have been made anyway on the same terms, maybe indemnification is not the remedy. For a fraudulent loan, which the originator should have detected, indemnification is the correct remedy. Originators can be sued for treble damages under the false claims act. We would like to see this act applied only to the two most severe severity buckets.
On the servicing side, a number of changes are necessary. The FHA has timelines that are inconsistent with CFBP rules. The rules are also inflexible: the FHA sets timelines for each stage of the foreclosure process, rather than the entire process, with onerous penalties for missing a deadline. This means if one part of the process moves slowly, the lender has no way to avoid the penalty, by trying to move more swiftly elsewhere.
In addition, the allowance for repairs is often too low, ($2500) for a roof repair for example. And there are maximums both on the total repair budget and on each piece of the budget.
Do you see FHA fading into the background as Fannie Mae, Freddie Mac, and various mortgage insurance companies roll out low down payment programs? Would this be good for housing?
No, FHA will never fade completely: they will inevitably be the lender of last resort, making loans to borrowers that are too risky for Fannie Mae and Freddie Mac.
It is important to realize that Fannie Mae, Freddie Mac, and the mortgage insurers do risk based pricing: More risky borrowers pay more: FHA does not do risk based pricing. Thus, more risky borrowers will usually find FHA lending to be their most attractive option from a pricing point of view.
You wrote a report about the disappearance of non-government mortgages. When do you see private banks and lenders coming back into the market? Are the days of non-government mortgage lending gone forever?
The private-label securities (PLS) market has supported mortgage lending in the United States for 38 years, and our report centered on how little of that lending is taking place. This is less of a problem for prime borrowers with sterling credit who want jumbo loans, as banks are making loans to pristine borrowers, and holding these loans on their own balance sheet.
However, borrowers who don’t meet government lending standards and have imperfect credit have difficulties obtaining a mortgage at the present time. If banks retreat from lending before the PLS market restarts, other borrowers in higher cost areas who need jumbo loans will begin to lose access to affordable mortgages. We hope PLS participants will take the steps necessary, (detailed in the linked brief) to attract more investors, a precondition to re-opening this market.
Have you heard of any updates to the popular HARP program? Do you think underwater homeowners who do not have a Fannie Mae or Freddie Mac loan will ever have a chance at refinancing?
I have not heard of any updates to the HARP program, currently scheduled to sunset at the end of 2016.
Underwater borrowers who do not have a Fannie, Freddie, or FHA loan will continue to experience difficultly in refinancing in the near time. Over time, fewer of these homes will be underwater, as we expect home price appreciation to continue. At that point, they will have options.
If you could give home buyers one piece of advice considering all you know about housing finance policy, what would it be?
Know what your loan terms are and don’t ever borrow more than you can pay back based on your current income.
Laurie, thanks for your in-depth and insightful answers. MyMortgageInsider.com readers appreciate your time.