Taub and the Long, Bleak Story of Housing

Jennifer Taub's Other People's Houses is likely to be about as good a book as we are going to get by way of overview of the woes of the housing market over the last generation. Which is a pity because it might have been better.   It has some great virtues, of which more in a moment.   I suspect its primary problem is that the author set herself too ambitious a goal and wasn't able to get control of her material.

In particular, she decided it was necessary, in order to tell the story of the recent uproar, also to go back and (re)tell the story of the Savings and Loan debacle of the 80s.   I can understand her thinking here:  much of our late calamity does indeed have its roots in the S and L mess, and you can understand today better if you understand yesterday.  But there are similarities as well as differences and would be useful to try to isolate and identify those differences for whatever lessons they may offer. On the same theme, while we may not yet be ready for the last word on the Savings and Loan era, still, we ought to be in a position to impose some kind of framework (however simplistic) and to formulate some useful questions.  

  Taub doesn't do that, and so she is reduced to telling some individual stories.  Some of the stories are good, but there's no identifiable pattern to what she has put in and what she has left out.   Moreover in the nature of things, she winds up relying heavily on secondary sources: if you read Martin Mayer or William K. Black on the S and Ls (or, to one forward, Kirsten Grind on WaMu) you're going to find a lot here that you have read before (exhaustively footnoted, I should say--Taub is nothing if not conscientious about sourcing).

One irony is that, protean as her reach may be, it is remarkable how much she feels she has to leave out. Sometimes the choices appear just arbitrary. For example, she includes an account of the notorious "Keating Five"--the senators who earned themselves a moment's notoriety for their role(s) in seeking to protect the infamous Charles Keating, one of the poster boys of S and L bad behavior.  Yet she does almost nothing with the underlying Keating story.  Very well: she had to leave a lot out--but if Keating isn't important, how can the Keating Five be?

Perhaps a deeper structural flaw is that she tells the reader almost nothing about Michael Milken and the junk bond revolution.   Needless to say, I feel her pain: the Milken story is stuff enough for a book in itself (actually, there are several good ones).  I certainly can't blame her for not wanting to tackle it here--but if she doesn't tackle it, she can't really claim to be telling the whole story.

She also spends what I would regard as an undue amount of time on one Supreme Court case--Nobelman, well known to bankruptcy cognoscenti.  For those outside the inner circle, this is the case where the Supremes held that the Bankruptcy Code debars a Chapter 13 ("regular income") debtor from rewriting his home mortgage.  Taub disapproves.  She's strongly of the view that rewrites in troubled times. But here matters get complicated.      She also believes that rewrites should be done via the bankruptcy court.    After some waffling, I've pretty much come round to the view that rewrites are a good thing (see this).   But must it be done by the bankruptcy court?  Again, I think she might be right that it should be.  But I don't think it is a deal point: I would rather have seen her concentrate on rewrites per se, leaving the question of who and how as a side issue.   Linking the two as if they were necessary corollaries unduly complicates her argument. 

[And FWIW I think she was too hard on the Supremes.  The issue was a fairly straightforward matter of statutory interpretation.  I think they read it correctly (and the decision was nine-zip, so I am not alone).  But right or wrong, statutory interpretation is all they saw themselves as going.  So if Taub has a beef, it's really with the Congress that wrote the statute to begin with.]

But enough about stories  In contrast to the early chapters, I think far the best part of the book is, ironically, also perhaps the least salable.  That would be Chapter 14, her careful account of the institutional structure, both in the banks and in government, its slow, inexorable path to disaster.  She identifies five "links" (supine Fed; securitization;  collateralized debt obligations (CDOs) and CDOs-squared; credit default swaps (confusingly, CDSs); and leverage.  The tag lines will be familiar to anyone paying attention, but it is the richness of her detail that gives her account density and heft.  To this we can add her final chapter, in which she traces the failure of housing reform in the Obama administration--and lays the blame like a dead rat on the doorstep of the President himself (she tops it off with a useful aide-memoir of the arguments against mortgage rewrites, together with rebuttals).

There is, in short, a lot of good stuff here.  I'm glad I read it, and I'll go back to it. But at the end of the day, I think she does nothing so much as just prove how damn complicated the whole story is.

Chintzy afterthought:  the title is touching, but does it make any sense?  Her whole point (with which I would agree) seems to be that it is these people we are talking about, the owners, and that these are their houses, not those of anybody else.

Sheila Bair Displays Practical Good Sense

At least in the spin of her enemies (she had a few) Sheila Bair came across as the Lucy Van Pelt of the mortgage meltdown: as head of the Federal Deposit Insurance Corporation--the "other regulator," alongside Treasury, the Fed and the Office of the Controller of Currency--she was the one who didn't seem to get the memo.  Which memo?  Why, the one that said she was supposed to show up on demand and sign here, here and here, so the big kids could get on with their game.   This was never quite plausible (for one thing, if she was Lucy Van Pelt, who was Charlie Brown?).  But her troops never seemed to have the publicity firepower as her more austere overlords were able to deploy.

So naturally, one looked forward to a memoir from Mrs.Blair, to let her tell (or vent) her side of the policy differences that drove her into the dissenter's role as the A-team struggled so mightily to stay in front of thee onrushing waves.

Now we have it, and so far (I haven't finished it), I'd say she does herself proud.  It's ;perhaps not as entertaining--for which read "intemperate"--as Neal Barofsky's book about his time as inspector-general of TARP (link).  It may lack some of the sophistication that you might expect from a Wall Street Banker, fhe reader is left to her own judgment as to whether that is a defect of a virtue.  What it does display is that Bair had a coherent and clear-headed vision of what her regulatory responsibilities were and a Kansas girl's practicality in trying to meet them..   One gets the sense of her various qaualities at work in the passage below, where she tries to explain one of the great puzzles of the whole sorry episode--why weren't the banks more willing to do workouts on loans that they didn't stand a chance of getting paid off under any scenario.  Here she offers one of the most useful, practical, clear-headed analyses of the problem that I can imagine:

 Prior to the crisis, the job of a residential mortgage servicer consisted primarily of collecting mortgage payments and passing them on to investors. When a loan would occasionally default, the servicer would simply refer the loan to a foreclosure attorney. Servicers were not set up to deal with mortgage default because it happened so infrequently. Similarly, the agreements under which they operated compensated them based on a flat fee; they were not paid more for dealing with a delinquent loan, so their economic incentive was to do as little as possible with a troubled borrower. Indeed, during the go-go years leading up to the crisis,  competition among servicers for the fees generated by the burgeoning securitization market intensified, driving fees down further and making the business one purely of volume, not of effective servicing. Not surprisingly, under that flat fee structure and in the face of intense competition, servicers never invested sufficient resources to deal with significant delinquencies. There are minimal costs associated with collecting mortgage payments from performing borrowers and passing them on to investors. However, when a loan becomes delinquent, working with a troubled borrower to restructure a loan can be a time-consuming, labor-intensive process, particularly if each modification is individually negotiated. Servicers were not compensated for making the extra effort, so why bother?

 Actually, as we would soon discover, if anything, servicers had affirmative economic incentives to go to foreclosure quickly.  That was because when a loan they serviced became delinquent, they were required to continue to advance the mortgage payments to the investors out of their own pockets. If they modified the loan instead of foreclosing, they would be reimbursed by the borrower slowly, over a period of years, by taking out a small part of the borrower’s new monthly payment. On the other hand, if they went to foreclosure, they were paid immediately, off the top, from foreclosure sale proceeds. If you were they, which would you do?
 
 Why wouldn’t investors tell the servicers to modify loans? After all, if a foreclosure cost more money than a modification, it was the investors, not the servicers, who took the loss. But in point of fact, just the opposite happened, with some investors threatening to sue servicers over modifying loans. Why would investors want to sue servicers for trying to rehabilitate delinquent loans? After all, that would usually save them money over the cost of foreclosure. The answer to that question goes to the heart of what I believe was probably the single biggest impediment to getting the toxic loans restructured: the conflicting economic incentives of investors themselves.

 Remember the tranches we discussed? As you will recall, most mortgage securitizations were set up to provide the senior tranche— the triple-A portion of the securitization— with substantial overcollateralization. What that meant was that if a mortgage   defaulted, it had no impact whatsoever on the senior tranche— unless the defaulting mortgages exceeded 20 to 30 percent of the mortgage pool. However, here is the catch: because of the way in which many securitization documents were written, if, instead of a foreclosure sale, the loan was modified, the reduced mortgage payments flowed through to all investors in the securitization pool, meaning that everyone’s income was reduced, including that of the triple-A investors. 

So again,  would you do if you were a triple-A investor? If a loan becomes delinquent and the servicer modifies it with a 30 percent payment reduction, your portion of the payment flows from that mortgage will be reduced along with all the other bond holders. If, however, the servicer simply forecloses on the loan, even if the losses on foreclosure amount to 50 percent, you will still prefer the foreclosure because that entire loss will be absorbed by the lower tranches. From the standpoint of investors as a whole, it obviously makes more sense for the loan to be modified with a 30 percent loss instead of a 50 percent loss on foreclosure. However, from the standpoint of the triple-A bondholders, it makes more sense to foreclose. And the triple-A bondholders were more numerous and more powerful than investors and more powerful than investors holding the subordinate tranches.

 Bair, Sheila (2012-09-25). Bull by the Horns (Kindle Locations 1149-1181). Simon & Schuster, Inc.. Kindle Edition.

Tyler on Fannie/Freddie

Tyler at MR does a manful job of trying to look patient and scholarly in his review of the evidence as to the role of Fannie/Freddie in the great bustup, but I think he conflates two different issues.

One is the question whether Fannie/Freddie misbehaved in the years leading up to the pop.  On that point, I don't think anybody can quarrel that Fannie (at least) has an appalling record of institutional misbehavior: rapacious and corrupt and willing to do whatever it could to pervert the lawful structure of good government--in short, they behaved like a money center bank.

But two is the question whether the meltdown was the result of an irresponsible campaign to increase low-income home ownership.  I'd say there is some evidence to support the proponents of this latter view, but that on balance, there are so many other factors at work here that the press to expand low income home ownership almost gets buried in the debris (for a fuller account, go here, here.  A particular reason to find this account plausible is that Fannie and Freddie didn't even want subprime all that bad; they were willing to make the right noises about serving  public purpose but at the end of the day they had no more interest in the larger public good than Stan O'Neal, Dick Fuld or Jimmie Cayne.  They wanted the same stuff the private sector  (originally) wanted: bales and bales of good, solid, middle-class loans with big spreads and dependable payment streams.  Or, they wanted that until they didn't want it, which is to say until they started pouring gasoline on a bonfire.

So I think the case that "subrime caused the meltdown" is mostly bogus.  I do think that defenders of Fannie/Freddie get a bit ahead of their skis sometimes, and I suspect the reason is that they fear for the institutions per se; the defenders  see their enemies as wanting to put Fannie/Freddie out of business and they don't want Fannie/Freddie to go.  Me, I'm still on the fence on that issue.  It's not obvious to me that we need  government-sponsored mortgage market makers.  I can see you don't want to terminate tonight--or there would be no lending at all.  But schedule departure for five, ten years down the road, could be a good idea.

As I say, I'm on the fence.  I am open to further instruction.  But as a theory of the meltdown, I'd say "it's the poor people what dun it" is impudent and irresponsible and ought to go away.


Update:  Comment thread at the original MR post is good.  See also Yglesias, DeLong.

What Is it with the Knife?

I asked. Turns out there's a story to tell. The picture is by the distinguished portrait photographer, Edward Steichen. In a memoir, Joanna Steichen records:

Steichen's fierce, richly shadowed portrait of J. P. Morgan (plate 62) was commissioned merely as an aid to the memory of a portrait painter, Frederick Encke, who found the financier--probably the most powerful financier America has ever known--an impossibly impatient sitter. In order to complete the photographic sitting in just three minutes, Steichen had the janitor of his building sit in the portrait position while he arranged the chair in exactly the right light. Morgan arrived and sat down in the portrait pose. Steichen snapped the shutter, then put in another plate and asked the financier to shift his position. Morgan was irritated, moved, returned spontaneously to the requested position, and Steichen, having engineered a moment of real emotion, snapped again. He always claimed that the chair arm's resemblance to a dagger was purely accidental.

Link, emphasis added with a complementary unh hnh. Joanna Steichen adds:

Morgan had a hideously diseased nose that was never shown in painted portraits. When Steichen brought the finished prints to Morgan, he completely retouched the nose, as the painters did, in the official pose, but he left the other very close to its natural state. Morgan, incensed, tore up the unretouched print. Later, when Morgan's librarian, Belle Greene, saw a print of the rejected photograph, she declared it the best portrait of Morgan that ever had been made, and Morgan ordered some prints. In revenge, Steichen kept him waiting three years.

Oh, and thanks to BAM for noodging me to retrieve the picture.

Life Before Google: Community Activists in Chicago

Back when Barack Obama was still in middle school, community activists in Chicago were already at work trying to rev up the troops for housing reform. After a bit of modest local success, they decided to go national.

It wasn't long before West Side Coalition interns headed out to O'Hare International Airport, the one [place where they could find phone books for every big city in the country. They would look for listings that sounded like they could be for community organizations, and back at they office they called those groups, asking them to come to a big conference ...

Such was life before Google. That's Alyssa Katz in Our Lot, a history of thre modern mortgage revolution (a splendid book about which I intend to say more once I've finished it).

Update: Well, yes, I should have specified. The date appears to be 1975.

Oh, Felix...

The normally clear-sighted Felix Salmon dropped his glasses in the sink this morning, and put on the rose-colored ones instead. Averse to the burdens of home ownership, he just discovered the magic of rent-to-buy:

Often, it’s a simple lease with an embedded option to buy the property at a set price on a set date — an attempt to give the buyer a bit of time to scare up a downpayment, and to give the seller an income stream. Typically the option is purchased for cash (1% of the purchase price seems to be standard) at the same time that the lease is signed; generally if the option is exercised, the price of the option is deducted from the purchase price.

Alternatively, rent-to-buy schemes can increase the rental price and apply rent payments to the purchase price: here the price of the option is likely to be embedded in higher rent payments rather than being an explicit up-front payment.

Oh Felix, Felix. This "transferee" (I chose my words with care here) has the obligation to keep or walk away. This is non-recourse debt. Just like all first-mortgage residential in California (and most other mortgage debt here as well, but skip the details). That's what nonrecourse means: keep or walk away.

And he isn't done yet:

Then there’s a scheme I’ve heard of in Germany. Essentially it takes banks and mortgages out of the picture altogether, and sets up a long-term contract between the buyer and the seller. The buyer pays rent monthly, the house is essentially placed in escrow, and the buyer ends up owning the house after a set number of years paying rent. I like this scheme because it involves buying a house without any debt — and the buyer can even move house and sublease the property, so long as she continues to make rent payments to the seller. ...

Buying a house slowly, over time, is a great way of building equity without taking on debt — and it’s also a great way of making sure that you’re spending what you think it’s worth to live in a house, rather than speculating dangerously on future property prices. It’s also a great way of giving renters the same kind of emotional equity in their home — and the ability to make changes and improvements — that are generally the domain only of homeowners. Right now, when a lot of motivated sellers are looking to any possible way to move their properties, might be a very good time for these ideas to gain traction.

Felix, Felix baby: the buyer makes monthly payments. If he makes enough payments, he gets the house. If he can take or walk away, it is nonrecourse debt. If he has to take--no matter what the house is worth--this is debt. You can call it Mickey Mouse or Mr. Magoo; if it walks and quacks like debt, it's debt. Oh, Felix, Felix...

Afterthought: there is, inter alia, a huge industry devoted to deluding the acquirer of consumer goods on just this issue. Most of the customers are the most unsophisticaed and gullible, the ones most likely to be deluded by smoke and mirrors. Not usually the finance columnists for major news organizations.

How Nice to be Out of the Spotlight

Here's some reading with which to idle away the weekend: Calculated Risk is maintaining a list of almost-in-trouble banks (link)--some 550 at the moment, to match the 120 actual failures so far (link)--so you can learn who is coming soon to a receiver near you. It's searchable and sortable, although it does help to have a widescreen monitor.

But here's a curiosity: we're up in northern California, but inland, not the tourist part, Californie Profonde. And I skimmed the list to look at our neighborhood. And you know what? Nobody. Redding, Red Bluff, Chico, Paradise? Zip. Yuba City/Marysville? Nope. No Sacramento either,although we do find the Granite Community Bank of Granite Bay in the Sierra Foothills just east. With 2009 assets of $137,28,000, it is fairly small potatoes, bankwise (for some details, go here). But so far as I can tell, that is the only one even remotely close to this neck of the woods.

I haven't been buying or selling real estate lately (I paid off my last mortgage about eight years ago) but this pretty much fits my intuition. So far as I can tell, prices around here never skyrocketed that much, and haven't fallen that much either. From local gossip, I hear that neighbor put her house up last year at $300,000; she thought she had a deal at $295,000 but it fell through; she sold it a second time a few weeks later at $305,000. Sheesh, what century are we in, anyway?

In Which I Flunk Bob Lawless' Secured Credit Exam

Remember that tee-hee about OJ's mortgage and how a note in the WaMu file said the judgment against him wasn't any good because (he said) he didn't do the crime (tee-hee)--? My friend Bob Lawless suggests that WaMu was in fact very likely on sound ground. Florida has an unlimited homestead exemption, so the judgment lien may in fact not have reached his Florida home. But homestead exemptions aren't valid against secured lenders (for more on this, go here).

Amplifying in an off-line exchange, Bob points out that there probably was some kind of lawyer protocol on record telling the folks tweendecks that the mortgage would have priority, and so the note in the file was just chatter.

I am persuaded, with one minor exception. That is: a handful of Florida cases seem to have let creditors wiggle in past the unlimited homestead. It's hard to find a golden thread through these cases, except to say that the judge seems to have found the creditor particularly unattractive.

But this is a pretty slender reed. I'm inclined to say game, set and match for Bob. But what am I missing this time?

Lien Priority Story of the Day

Someone in Florida had made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wife’s parents,” she recalled. Simpson had been acquitted of killing his wife Nicole and her friend but was later found liable for their deaths in a civil lawsuit; that judgment took precedence over other debts, such as if Simpson defaulted on his WaMu loan.

When I asked how we could possibly foreclose on it, they said there was a letter in the file from O.J. Simpson saying “the judgment is no good, because I didn’t do it.”

Seattle Post-Intelligencer, via Popehat, via League of Ordinary Gentlemen.

[Proof, as others have said, that dead trees still have a pulse.]

Glaeser on Mortgages

There's so much good sense in Edward L. Glaeser's view of the mortgage market that it is really a surprise to see him go completely off the rails when it comes to his proposal for reform (link). He's right that foreclosure moratoria are just a form of inefficient wealth transfer to a not-terribly beguiling tranche of borrowers. He's right to say that we should find a way to make foreclosure less costly. He's right--and this is important--to say tht lots of workouts would happen if we could figure out some way to unlock the right incentives from the decentralized anonymity of securitization.

But as to settlements imposed by the bankruptcy court--well, I suppose he's right again, insofar as he is saying that these imposed settlements are no more than a second best. But he vastly overestimates the novelty of using the bankruptcy courts to impose settlements. As others have said--heck, as I have said--bankruptcy judges have been doing this for a long time, with respect to every form of collateral except the home mortgage. And precisely here is where Glaeser gets silliest, characterizing these bankruptcy judges as 'without specific expertise in housing markets."

Whoah, big boy, I don't know where you have been spending your time lately, but it can't have been the bankruptcy court: quite contrary to what you suggest here, I'd say I can't think of any cadre more qualified to understand these distressed deals--their structure and context--than the judges who deal with it every day. Rather than the horror of the bankruptcy court, Glaeser wants to transfer the work to "a formal renegotiation authority [ that] would essentially duplicate what a hyper-efficient bank would do if it owned the mortgage in its entirety." I can't imagine where he expects to get these paladins of efficiency would come from--unemployed bankers, I suppose--but really don't see how (if the job must be done at all) he can improve on the judges who do a large part of the job alrady.

Footnote: since I'm blanketing the soil with rose petals, I might as well add that Glaeser is right again when he said we're way past due for scuttling the home mortgage deduction (link). And rightest of all when he admits that his proposal is "quixotic."