
America’s housing system still has not been properly reformed - martincmartin
http://www.economist.com/news/leaders/21705317-americas-housing-system-was-centre-last-crisis-it-has-still-not-been-properly
======
chollida1
I'd agree that the US housing and derivatives markets are in a much better
position than in 2007-2008. Atleast people who are getting mortgages now have
some form of documentation, and risk manages are being asked to do their jobs.

The crisis now is that, and this is just my opinion, low rates are here to
stay. with the amount of money in the system, people are being priced out of
homes and as time goes on the amount by which they are priced out in the big
cities is only going to grow.

As an aside...

I'm not a lawyer but I've heard people say My cousin Vinny is the most
accurate court room movie ever. In a similar vein, I'd nominate the Big Short
as one of the more accurate wall street movies ever made.

It showed the lone wolf who not only saw the coming crash, this was far and
away the easiest part, but figured out how to profit form it by getting the
banks to write him a CDS.

The two smart kids working out of their garage that were smart enough to
succeed despite all their mistakes.

The hedge fund who did an incredible amount of due diligence, going to
properties, knocking on doors, talking to people inside the industry to put
together the pieces that no one else could.

The wall street sales guy who sold the CDS knowing that it might bankrupt his
company but figured he'd make a killing on his commissions long before that
happened.

And the most accurate part of the movie was that it showed the anguish that
each of these people went through. They'd seen something no one else had, been
right about it, had the event happen and even then everyone else continued to
plug their ears and pretend nothing was going on while they continued to bleed
money each month. It really did a good job of showing that you can be right
about everything and still not make money if the rest of the market continues
to act insane.

In 2007 there really was a sense that people knew things were way out of hand
but everyone was thinking, "If I can just get one or two more years on the
bonus cycle, I'll be able to get out". To be fair, this type of thinking
probably ins't going away anytime soon.

~~~
soperj
Pretty much everyone is saying that interest rates are going up in the US and
are going to go up soon. Alan Greenspan just came out today saying people are
going to be surprised how quickly they go up.

~~~
chollida1
> Pretty much everyone is saying that interest rates are going up in the US
> and are going to go up soon.

I wouldn't say that.

According to Bloomberg's interest rate predictor the probability of a hike
before the end of the year, ie the definition of soon, is less than 50%.

Even if you go out to the end of 2017 you still only get to 67% probability of
a fed hike. And 67% is a far cry from "pretty much everyone".

And even with all of that, the most predicted rate hike is a minuscule 0.25%
to 0.5%.

Now, I agree that this is all up for debate and markets can definitely get
this wrong, but I stand by my assertion that low rates are here to stay. I
really don't think the years of 5-8% rates are coming back any time soon.

But I'm always willing to change my mind if someone can convince me, so back
to you.....What makes you think that this era of low rates is going to end?

~~~
nstj
Not that people's bets mean much, but you can look at how financial markets
expect rates to move using the interest rate futures market. These contracts
allow you to infer what the market really expects rates to do (as people are
putting their money where their mouth is - to the tune of billions of dollars
rather than an off the cuff comment on a financial news show). Free data for
the 30 day future contract/bet is available from Quandl - which is a great
site for checking out free financial data:
[https://www.quandl.com/collections/futures/cme-30-day-fed-
fu...](https://www.quandl.com/collections/futures/cme-30-day-fed-funds-
futures)

~~~
wahern
Or just look at government bonds. Investors wouldn't be investing in 10-year
bonds with negative yields if they thought interest rates were going to go up
significantly.

I don't work in the financial industry, but just as a bystander it seems clear
to me that there are a lot of bond traders, like Bill Gross, who have strong
interests in rates going up significantly. Just like small-cap, pump-and-dump
scammers, they're trying to move markets with their sophist predictions.

I don't think there's much of a dispute that there'll be a regression to some
mean. But judging by where people are actually putting their money, the time
horizon appears to be much further away than many of the pundits would have us
believe.

Also, Japan....

------
cylinder
The fact that we were not able to ban mortgage securitization after the crisis
is appalling. IMO this is the root of the problems. Make banks hold their
loans on their balance sheets!

I also think the point about banks having capital buffers is laughable and not
logical. It's like claiming we've solved chronic migraines because we have a
stash of Tylenol. The cause has not been eliminated. And let's say there's a
crisis and that bank capital is used to cover the losses. Now what? You now
have banks which according to our own definition are under-capitalized. They
used all their capital for yet another crisis. So now your banking system is
weak again. Who is going to give money for these banks to capitalize again if
they keep having crisis after crisis? Ah that's right, the taxpayer!

A nation's banking system reflects its cultural values. This is quite true
about the USA.

~~~
mcnees287
It sounds like a reasonable theory on its face. However, the outcome of this
is likely that banks will stop making loans all together. If they were to
offer mortgages at all, it certainly would not be a 30 year fixed rate
product.

It's not correct to say that banks can sell off all of their risk through
securitization. They do in fact retain some of the risk. Though most has been
transferred.

The buffer is (in theory) in excess of the losses. So, after a crises a bank
would be left with the buffer and be able to continue to operate as a going-
concern. The question is how to set the buffer and how big ?

~~~
woodandsteel
>However, the outcome of this is likely that banks will stop making loans all
together.

Really? We had a healthy mortgage market for a great many decades before
mortgage backed securities were invented. And if mortgages are such a bad idea
that banks can't make money off of them, then we shouldn't have them.

~~~
evanpw
The secondary mortgage market isn't a recent invention. It's been an explicit
policy goal of the US government at least since the Great Depression.

------
dzdt
_Partly because the state charges too little for the guarantees it offers,
taxpayers are subsidising housing borrowers to the tune of up to $150 billion
a year, or 1% of GDP._

The original post makes this claim without any citation. I don't think it is
correct. Recent stress-test reports on Fannie and Freddie show that, even
making provisions for future bailouts in the stressed scenario, the agencies
are profitable to the government. [1] Instead of costing $150 billion per
year, since the agencies were nationalised they have returned $60 billion to
the government.

[1] [https://www.bloomberg.com/view/articles/2016-08-08/fannie-
an...](https://www.bloomberg.com/view/articles/2016-08-08/fannie-and-freddie-
will-be-profitable-after-their-next-bailouts-too)

~~~
evanpw
This stress test is assuming credit losses about a quarter of the size of the
stress test 2 years ago, and much smaller than the last crisis (0.56% vs. 2%
vs. 1.4%). Does anybody know if something has structurally improved in the
Fannie/Freddie portfolios, or whether the testers are just less pessimistic
than they were 2 years ago?

[1]
[http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_DFA...](http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2016_DFAST_Severely-
Adverse-Scenario.pdf)

[2]
[http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/GSEFinPr...](http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/GSEFinProj2014FINAL.pdf)

[3]
[https://online.wsj.com/public/resources/documents/irasohnfin...](https://online.wsj.com/public/resources/documents/irasohnfinal2014.pdf)

~~~
fathom
If anything this [1] article would lead the reader to believe since
Fannie/Freddie are now spearheading the leading charge their portfolios are
further out of line with the market reality.

[1] [http://www.economist.com/news/leaders/21705317-americas-
hous...](http://www.economist.com/news/leaders/21705317-americas-housing-
system-was-centre-last-crisis-it-has-still-not-been-properly)

------
formula1
To sum it up, despite there being regulations on CDOs the real problem still
exists. That problem is that loans are easy to get the gov stamp. Thos makes
it easy for new home owners to get loans. And this makes it easy for sales
people to sell the loans.

Much of this opinion article is based on an other article [0] which seems less
doom and gloom and more about the shift to a majority of state sponsored
loans. This in itself its own issue in that capitalism isnt doing what it
should be when everything is subsidized by the gov.

Ultimately these two articles seem to be about responsibility. Banks are not
responsible for homeowners making poor decisions. Banks are not responsible
for investors trusting a market that is not self sufficient. And Banks are not
responsible for the government to enable them with tax payer money. Meanwhile
everyone can point the finger back to the banks and the bank depends on the
fact that too many economies rely on them to fall

[0] [http://www.economist.com/news/briefing/21705316-how-
america-...](http://www.economist.com/news/briefing/21705316-how-america-
accidentally-nationalised-its-mortgage-market-comradely-capitalism)

~~~
bradleyjg
Why does the government need to be involved in mortgage lending at all? Is
there a specific market failure inherent in it people can point to that calls
for government intervention to overcome (akin to the public good failure for
e.g. roads)?

~~~
eli_gottlieb
Homeownership was a major pillar of post-WW2 cultural stability among the
middle class, so subsidizing it was considered a social good.

~~~
internaut
Cringed while reading. We've got to stop transcribing intuitions into
universal laws if we want to claim the sapiens in homo sapiens.

Regardless of political stance, for any animal to require half its lifetime in
effort to acquire a shelter, well that is retarded. And for some reason we
consider ourselves more enlightened than our ancestors building functionally
useless monoliths. At least the pyramids united the tribe or whatever.

~~~
formula1
I feel like I can relate to your position however I believe there is much more
to this than simply "unevolved"

\- a hive mind (similar to that of bees or ants) likely considers death to be
a reasonable loss to the point of canabalism being deemed reasonable. This is
probably the closest to full centralization there is.

\- in gorillas there tends to be one male per multiple females and per area.
There also tends to be a female pecking order where one stands dominant and
weaker ones get scars. This is probably the closest to fully independent since
each individual only gets what they take.

We live in a world where money can be anywhere and we want to allow anyone to
have the opportunity to get what they want (so long as it doesnt harm the
collective good). What tends to happen is the money becomes centralized to
trade centers or with rare resources like peaceful community or opportunity in
entertainment. However, space is a scarce commodity in these locations because
it attracts so many people. So isnt it fair to increase the prices? The people
who are making the most money for the area should have the most convinient
location.

"unevolved" implies that there isnt rhyme or reason to this.

------
n00b101
_The simplest approach would be ... The nationalised mortgage firms that
guarantee the bonds ... should be forced to raise their capital buffers and
increase their fees_

Raising capital requirements seems like a minor tweak, a band-aid cure.

I would argue that the systemic risk could better be managed by changing the
fundamental economics of the financial instrument in question: the classic
residential mortgage.

I'm surprised the Economist didn't mention the short-selling idea which
Richard Schiller has been pitching [1] since the Financial Crisis.

The basic idea is to make it possible to accurately short-sell residential
real estate. This would allow homeowners and lenders to be partially protected
against declines in real estate prices (the risk being transferred to third-
party speculators and investors). Just like a lender requires homeowners to
buy property insurance, it could also require homeowners to enter into
financial protection against declines in property value. This would protect
the homeowner against negative equity (where the property value falls
significantly below the borrowed principal). It was because of negative equity
that so many homeowners defaulted on their mortgages during the Financial
Crisis, leading to a vicious cycle of foreclosures, sales and declining
property values.

[1] [http://www.nytimes.com/2015/07/26/upshot/the-housing-
market-...](http://www.nytimes.com/2015/07/26/upshot/the-housing-market-still-
isnt-rational.html)

~~~
lintiness
the "protection" against negative equity is the down payment. negative equity
only matters if incomes take a hit and sales are forced.

~~~
n00b101
The down payment is equity, it's not really the same as protection. Although
the higher your down payment, the lower your leverage risk. Let's say you put
$100k down to purchase a property for $500k (i.e. you borrow $400k). If the
property value falls to $400k (20% drop), your entire equity is wiped out. If
you sell the property, the proceeds go to the bank to pay back the loan, and
you have lost 100% of your the original $100k down payment ... This is due to
leverage. If the property value falls below $400k, then you are in a negative
equity situation ... Get deep enough into negative equity and it becomes
rational for some people to just default and "walk away."

~~~
lintiness
very few non-recourse loans in the housing market these days. a 20% decline in
housing prices, and there's limited - zero systemic risk (ie the banks via
linked derivatives that the author's so worried about); only the owner loses.

------
roymurdock
The linked article seems to be a bombastic summary of a longer, more neutral,
and better-supported article [1]. Strangely enough, they were published on the
same day and apparently are both featured in the print edition? It seems like
The Economist is doing A/B testing to see what draws more outrage from its
readers: "Nightmare on Main Street" or "Comradely Capitalism"?

The linked article is confusing and uninformative. I suggest reading the
longer version.

[1] [http://www.economist.com/news/briefing/21705316-how-
america-...](http://www.economist.com/news/briefing/21705316-how-america-
accidentally-nationalised-its-mortgage-market-comradely-capitalism)

~~~
martincmartin
The linked article is an editorial, the other article the news article. The
Economist calls their editorials "leaders," which I agree is confusing. But
its standard practice to publish both an editorial and a news/information
piece in the same issue.

------
grandalf
One other thing to keep in mind is that there was a great boom in building in
the US during the 1970s and 1980s, and many of the homes built during that
period were built using substandard building materials and techniques, many of
which are no longer up to code for new construction but were grandfathered in.

How many of those millions of homes are actually solid, reliable structures?
How many suffer from moisture damage, mold, or have been poorly maintained?
What kind of cement was used to pour the foundation? What kind of insulation?
How many insect or rodent infestations has the house suffered?

There is a vast difference in quality between an old building in a city that
has been renovated for apartments compared to a suburban home that has
essentially gone unmaintained for decades and was built as part of a
speculative housing development project by someone who had no long term
interest in the quality of the construction.

I think we'll start to see a gradual crumbling/disintegration of suburbia as
the houses fall into disrepair and the mortgage debtors are in too far over
their heads to afford proper maintenance.

The right thing to do in 2008 would have been to let the prices fall and stay
down, to encourage proper renovation and maintenance.

~~~
tcoppi
Do you have any articles/books detailing construction practices during that
time period? Also any numbers on what percent of housing in America was built
during that time period.

------
gjem97
Can anyone provide any background/documentation on the claim "Now 65-80% of
new mortgages are stamped with a guarantee from Uncle Sam that protects
investors from the risk that homeowners default"? I don't really doubt that
it's true, I'd just like to learn more about what that is and how it works.

~~~
mcnees287
Meaning, the mortgages (default risk) are guaranteed by the government, either
explicitly (FHA) or implicitly through a government sponsored interprise
(Fannie and Freddie).

After the housing crisis the private market (mostly banks) left very quickly.
FHA and the GSEs stepped in and took their share.

~~~
gjem97
Does the FHA issue bonds? (Turns out this stuff is nigh impossible to Google.)

~~~
mcnees287
Yes. FHA and the GSEs pool mortgages from banks, stamp them with their
guarantee, and then sell the loan pools as MBS to investors.

(Most) banks, especially small ones, are unwilling to sell and hold a fixed
rate 30 year mortgage. There's way too much risk, price volatility (driven by
rates) and uncertainty about what will happen over a 30 year time period.

Banks only do a 30 year mortgage because they know they can sell it to FHA or
the GSEs.

------
ssharp
The last crisis was also heavily related to sub-prime mortgages. How much has
sub-prime lending been mitigated?

Before the last crash, you could get "no paperwork" mortgages, you'd just to
have a little higher interest rate. Lenders would also squeeze people into
ARMs so their initial rates were really low and then would go up after the
adjustment period. And nobody cared about things like PMI because prices were
going up so quickly. You'd have enough equity in your house if a few years and
the PMI would go away.

The general consensus was that if you were in the market to buy, you should
buy as soon as possible before prices went up much more.

Thankfully, I live in an area that didn't see the enormous run up of house
values. The crash affected our housing and we still had the normal negative
effects of a big recession. Housing prices have certainly recovered by now and
I do wonder how much of it is still smoke and mirrors. But in markets like
Florida and Arizona where house prices got really out of control, have those
areas also recovered? That would be more shocking to me.

~~~
pessimizer
As far as I know, the last crisis _wasn 't_ heavily related to sub-prime
mortgages. The primary predictors of default were the amount of money down and
the numeracy of the borrower, not the borrower's credit score.

Plenty of people with excellent credit scores spent too much money on a house
and ended up defaulting, and even people who could afford the payments ended
up severely underwater; houses became very expensive very quickly, you
couldn't buy one without spending too much.

Blaming subprime is largely a right-wing narrative. The worst thing that
happened in subprime is that a lot of people (especially minorities) who could
have qualified for mortgages on better terms were steered into subprime and
ARMs because of their worth in high-growth (and ostensibly low-risk) CDOs.

~~~
talmand
I'm really curious about the things you are saying since they are so different
than what people regularly say on the subject. Especially the right-wing
narrative part. Can you suggest any sources on all this?

------
davidw
NIMBYism is already putting places like Palo Alto, Boulder, etc... well out of
reach of the middle class, with a class of "haves" that live there, and "have
nots" who have to drive in to work. What would happen to this situation if you
killed the subsidy off?

What would it do to the dynamic between generations: older people got a big
leg up, and you get nothing?

~~~
MollyR
It would cause alot of anger. I hear a lot of hatred at work towards the baby
boomers about everything

~~~
internaut
Niall Ferguson called this several years ago.

[http://www.telegraph.co.uk/finance/financialcrisis/9338997/R...](http://www.telegraph.co.uk/finance/financialcrisis/9338997/Reith-
Lecture-Were-mortgaging-the-future-of-the-younger-generation.html)

His Reith Lectures on the subject (Burke's social contract and its
implications today) are worth putting into your mp3 player.

Ctrl-F niall

[http://www.bbc.co.uk/programmes/b00729d9/episodes/downloads](http://www.bbc.co.uk/programmes/b00729d9/episodes/downloads)

~~~
MollyR
Thanks didn't know about that, and podcast link is super great!

------
dmh2000
House prices are like bond prices. When interest rates are low, prices go up.
When rates rise, prices will fall. People buy houses based on the monthly
payment they can qualify for. Right now, prices are high because the low
interest rates mean lowish monthly payments on inflated prices. But when rates
rise, the value of the houses will fall because buyers will not be able to
qualify at the previous inflated prices. This will mean that a lot of
homeowners will be underwater again. Even though they should be able to afford
their payment, there will be a similar level of panic.

------
yuhong
In retrospect, I wonder what would have happened if we let AIG and the banks
fail. The FDIC would convert them into DINBs with the insurance limit raised
to $250k per account holder. All debts including mortgages would be discharged
tax-free automatically (making the topic of mortgage notes moot). Bank charter
restrictions would be loosened so that new banks can be created as soon as
possible.

~~~
joe_the_user
Whatever the implications of letting the debt just "fall on floor" would have
been, it's worth noting that the decision to not allow that outcome was
reached years before the events themselves. Ben Bernanke's helicopter money
speech was at least one demonstration of this.

------
donclark
As I was driving into the office today, passing all these auto dealerships,
big, small, and mom and pops small. I wondered if they have an exit plan. In 5
years or less, every automobile manufacturer will have a self driving car.
Will it make their inventory obsolete or a lot less valuable? Will it make my
car a lot less valuable? On a side note:
[http://www.visualcapitalist.com/chart-largest-companies-
mark...](http://www.visualcapitalist.com/chart-largest-companies-market-
cap-15-years/)

------
donclark
Has anyone heard of this business? Why did I not know about this company
around 2010 when I needed a loan modification?!? They are in 42 cities in the
U.S. and have been around for 22 years. No down payment, no closing costs, no
fees, no income limit, no need for perfect credit!
[https://www.naca.com](https://www.naca.com)

------
HillaryBriss
> _Partly because the state charges too little for the guarantees it offers,
> taxpayers are subsidising housing borrowers to the tune of up to $150
> billion a year, or 1% of GDP._

The current environment offers housing borrowers money at a price below the
market.

The simplest bet with this cash (buying a house and holding) has probably been
overdone in the market. House prices are quite high now.

Still, small but crafty borrowers should be able to profit with this cheap
money.

~~~
Domenic_S
Buy and hold is fine, but that's a strategy like buying Blue Chip stocks.
Early 2000s real estate was like the options market -- super short term.

If you can hold a house 10 years, chances are very, very good you won't be
underwater at the end.

------
jackcosgrove
Yes it has not been fixed, but it's a supply-side problem and not a demand-
side problem. More houses should be built to meet demand, but this is not
happening in many cities.

------
Shivetya
I am still of the opinion that the government's maximums for its lending are
too high at 417k to 1.8m depending where you live.

~~~
toomuchtodo
You should be more concerned about downpayment amounts (3% is acceptable, and
some lenders will finance with 0%). This is what pushes home prices up
artificially.

I had a foreclosure where I stopped making payments in 2011. My foreclosure
finally completed in December of last year (4.5 years later). I already have
lenders who will finance me on a new mortgage.

It's madness.

~~~
muninn_
Yeah. Was speaking to a realtor yesterday actually about this (just an
acquaintance) and homes in some areas in a particular midwest city have risen
in value 23% in one year. As soon as a place goes on the market it has 10
offers over the asking price. This isn't good. But if you have a great job and
good job security it is idiotic to not buy a house right now with the low
interest rates assuming it's not way overpriced (and these can be found).

I purchased a home that costs about twice my annual salary. I think it's
reasonable. I put 0 down and walked away with a check at closing after seller
closing costs for some items I wanted repaired.

Anyway this is just my general commentary and my experience. I don't know
enough about the market as a whole to make any real informed contribution, but
just wanted to share anyway.

