Transcripts For CSPAN3 Key Capitol Hill Hearings 20140719 :

CSPAN3 Key Capitol Hill Hearings July 19, 2014

To the extent there are positive real subsidies to the except that they improve outcomes, they are either very localize to the family or very localized to the community in question. You work on capitol hill. I worked there for a number of years. Every other person who comes here in the door says its a great thing if you gave a subsidy for their industry and how many jobs they create. Thats what shopped around. They are grossly skabexaggerate. Lets think about housing for a second. We all need a place to live. An Apartment Building is not all that different than a condo. It actually takes the same amount of construction workers. Theres Nothing Specific about the tenure that increases jobs. Again, we all have to live somewhere. I think you should be skeptical of those job arguments that you often here. The chart youre looking at here is the lower bar thats the fannie and freddie market share. We hit long term homeownership rates in this country in 1960. The growth of fannie and freddie which really in the 70s they had single digit market shares. This he were irrelevant to the Mortgage Market before the snl crisis. The growth of them has seen no long term indrees in homeownership rates. Its fine to say we want to do things for homeownership but maybe we want to do things that do things for homeownership rather than things that claim to do thing for homeownership. The lower bar is the average loan to value for the house. I will say, again, this is ancient history but it always surprises me to think that before 1960, the majority of homeowners owned their homes free and clear. No mortgage at all. It was actually their house, not the banks house. This chart again shows the increasing level of leverage in households. So what all of these subsidies have done, they havent delivered Home Ownership but we have delivered getting households swimming over their heads in debt. Weve achieved that. Im not sure that thats a worth while Public Policy goal but again thats one that weve clearly accomplished. I would certainly say that i think part of that relates that we have used that debt to run up house prices that are not shown here but has not run up ownership rates. The rational for the gscs that were created in the 30s. Even the Federal Reserve, all of these institutions were created in the 30s, of course the fed was created in 1913, because we had a very fragmented banking system. In the mid90s. A bank was limited to one location. Of course that means if the biggest employer in town goes belly up it means the bank will go belly up. You had a lack of diversification that many of these diversifications like fannie mae were meant to solve that. If you look at the Great Depression in the u. S. And canada they similarly had a Great Depression. We had 10s of thousands of bank failures. Canada had zero. They didnt have a if ied or fdic but they had six banks well diversified across the country. Many have tried to subsid ut ti for diversification. The point would be, i think bank of america is at 49 states but we have a very large number of region banks that are well diversified geographically. If you look at for instance, yes, there are too big to fail issues with all the big banks but they are also able to go to market in the same way that the gscs are so i would argue the lack of access to capitol marketed, the lack of dif fe diversification we solved. We certainly need to remember the Federal Reserve purchased a trillion dollars in mortgaged back securities. The European Central bank purchased about 700 billion in mortgage bonds. We continue to have federal home loan banks. So i would submit that we could end fannie and freddie not release them with anything and still lead the world in mortgage socialism. One of the questions often asked is if we dont have them who do we have . Let me say i dont really look at this as an issue of how do we replace the entire 10 trillion Mortgage Market, i think we have household thats are very too massively leveraged. We really need to be thinking more of a 6 or 7 trillion Mortgage Market rather than 10. I dont think it has been good for households. Important to keep in mind average originalations are about a trillion a year. All of these have transition periods. Nobody seems to be recommending an overnight fix. Its a six to seven to ten year problem. Who would fund this . The securitiation system was something that promised to connect main street to wall street but the reality is the massive majority of funding for our Mortgage Markets still came from other Financial Institutions. It wasnt unusual in the crisis for say bank of america to take a thousand mortgages, sell those thousand mortgages to fannie e mae, they wrap those into a Mortgage Backed security and sells it back to bank of america. Why would you have this round about process that adds complexity and cost to the model. Yes, in that model fannie takes the credit risk from bank of america. Bank of america still takes the interest risk. More importantly they cut their capital more in half by holding mortgaged back securities rather than the whole mortgage. Our Current System combined with the capital standards we have for banks encourages massive leverage in our Mortgage Market. Looking solely at the institutional, the bank, the gsc, our Mortgage Market at the time of the crisis was leavage ed 60 to 1. Freddies guarantee business was leveraged 200 to 1. If youre leveraged 200 to 1, you will fail some day. This is a guarantee. Absolute lack of capital in the system. What i would propose is a system that we need to look forward to go back to in a sense. Again, there are lots of problem in the snl crisis that were deposit based. Some of we have addressed. Most of the rest of the developed world rely on a deposit system. To me it also reduces what economists call a simatic information problems which are those i will take you a loan b inchtsds in the word where the lender makes the loan locally. The lender is a sense has is your Current Employer likely to be around. Whats the local economy like. So i think theres a way you can do that and gather what i would call that soft local information into the lending process that we have lost of the it solves some of those problems. As i mentioned earlier, securitization was completely bosel capital standard driven not really driven by the economic benefits or the activities. As i touched upon, i think we could actually reduce foreclosures and do better loss mitigation if the person who originated the loan held the loan. If you go to the local bank of the bank where you made the loan, he has a Branch Manager of you lost your job but i know your employer will hire again or they can figure out this person is never toing to get that job back. They can do a much better job. One of the things in loss mitigation is trying to figure out of the people would are behind on their mortgages, whose got the chance to get back on their feet and who doesnt. I think if you have that local knowledge that is embedded in that, you could make much better decisions in this regard. You dont have to get into all of these negotiations with different people in that. The bank can locally make that decision itself. Mentioned as well, the diversity economic geographic diversity problem i think we dealt with. So much of our Mortgage Market was capital marketed funded during the crisis whether it was overnight lending, these things arent as sticky as deposits. What i moon by that, of course some of this is is tributed to deposit insurance and other to human behavior. Dp deposits usually stay with the bank you can go to the fdic website. Insurance total deposits have increased throughout the financial crisis. Yes, people were taking their deposits out of these troubled institutions. They were not putting them under their pillows. They were putting them in banks that were safe. It means the business shifts from miss mmanaged banks to oth banks. The blue line is auto sails and the housing starts. They followed each other down during the recession. They are subject to a lot of the same economic forces that drive them. The big spike in the auto is cash for clunkers. We basically went back to trend. It didnt change things in the long run. The point being here is despite the fact that we dont have a gsc for auto loans. I recognize we did bail out a couple of auto companies. That said it doesnt affect the finance side as much. We saw autos recover the same rate with the economy. This is a similar chart with the Mortgage Market being the hump shape and the other chart is consumer borrowing not including autos so short term installment loans, credit card loans. So here again the recovery matched the economy in the recovery. The economy recovery is weak but it recovered along with the rest of the economy whereas the Housing Market did not. The point with the two slides is weve thrown these massive guarantees at the Mortgage Market and yet it continues to be weaker. The Housing Market continues to be weaker than other segments of the economy which this traditionally moves with. We have to ask what exactly are we getting for all of these guarantees were throwing at this. Despite again the fact that we have no gse, we have to auto loan gse, you can get them at relatively affordable rate. Slightly above mortgage rates. You can get them fixed for up to five years, sometime seven years. The typical life of a mortgage is only seven years. People do not keep a 30 year mortgage for 30 years. So the fact is we can manage that Interest Rate risk for some amount of time. We saw some recovery. Interestingly enough, a lot of the debate, kevin touched upon the down payment issue. A lot of the opposition in Mortgage Finance reform is the sense if people had to put down down payments you would exclude a lot of people. The auto loan is an interesting area because the auto loans are pretty much under water the second you drive off the lot. Yet we saw during this crisis and we saw regularly that auto loans performed better than housing loans. Now, of course, i suspect that might have something to do with the fact that if you dont pay your car loan over a long amount of time you will get outside of your house one day and your car will be gone. Funny how that incentivizes people to pay. Obviously as we know on the other hand, i believe the median time to get somebody out of their house in chicago is a thousand days after they have stopped paying their mortgage. Over three years. I am no way implying that people are lazy or playing the system. Im just saying its pretty attractive. I mentioned earlier the decline in mobility rates might actually encourage you to stay in place if you are in orlando and chicago and youve lot your job and youre looking at the fact of i can get three years rent free or i can, you know, move to dallas texas and try oto find a job and pay my own rent. If you want to subsidize and assist people thats an important debate to have, you can do it in a way that does not lock them in place. If you want to give cash or keys. Relocation assistance. If you want to pay somebodys rent for six months. Those things would be far more effective than the programs we have chose en to do because we have chosen to lock people in lace. Also important to keep in mind, if you send a lot of time around economists and you Read Economic journals, they spend a lot of time debating market value and then they start of wave a magic wand and say therefore this beneficial all knowing social plan will come in and fix everything. Im the first to say we should have legitimate realistic world model maof markets and governme. Some things need to be kept in mind in terms of any sort of government reform in the Mortgage Finance system. These are also some of my observations from having worked opt hill but also sort of my observations of having study public choice in some the incen there. You could imagine if your boss was going to go out and campaign saying i think you need to bring the price of your house down. You wont get reelected on that. My experience is the financial regulators within their discretion bend the will of the oversight committees. If everybody feels like they are making a lot of money, no regulator, no politician is going to stand up against that. The system in itself will look the other way when were in a bubble. The system will overreact and clamp down when the bubble goes bust. You really need to have market incentives that lean against that. If you look at Companies Like fannie mae, enron. These short sellers identified problems long before the fcc or regulators. Again, the political system will push the opposite. As i mentioned, i spent my time as the bubble was building on the banking committee. For every one person who came in my door and raised some concern about the Housing Market being unstable. I had a 100 oather people who se all of these housing prices go up. All federal Insurance Programs are cash flow. Theres no laock box for anything. Banks pay premiums. What we do with these premiums is we them in treasuries. So they give us pieces of paper and we them in the fdic. What does pressure treesury yo sent it. So, again, any Insurance Program is fundamentally going to be cash flow. Ive certainly seen on the other side. I remember i spent years arguing with the appropriation committee, they decided the federal House Commission was throwing off lots of excess cash that they could spend and did spend. I turned out being wrong. It doesnt matter now because all of that money has been spent. Its also important to keep in mind, you know, you will see that. We will see this increasing on capitol hill is the budget pressures continue to increase in the future years. The attractiveness for politicians will be how do i give transfers that wont be reflected on the budget. Theres no better way and no more attractive area to do this than Mortgage Finance. You can hide the subsidies in a way that dont come back and blow up until later and its somebody elses problem. Let me say, the event was not a tail event. One of the things to keep in mind the competition in guarantees dont mix. Lets go back to our econ 101. It means that you earned 0 rent. That nobody earns excess profits that failure is pushed to the margin. I think one of the reasons we had a crisis where the banking markets were very uncompetitive to a world where Mortgage Finance became increasingly competitive. The problem is all of the competitive players whether the banks or gses had guarantees. Im a big fan of competition. I think competition binges consumer choice. We as a Society Needs to make a choice. We can either have extensive guarantees or you can have competition where theres wide choices for consumers. You can not have whole. If you have vigorous competition and guarantees, you will pay out at some point. Also important to keep in mind that i will see a day where the Housing Market only goes up. We havent fixed the housing business cycle. There will be a boom and bust again maybe sooner than later. They have to assume that we will see another bust again. Part of the problem here to me is fundamentally what weve seen with all of these guarantees of creditors is weve had government regulation substitute for the market discipline you would see. The regulators who never lose their jobs are being responsible for overseeing this. Weve been told the creditors in the system to not Pay Attention because they wont lose anything. Theres very weak incentives. My favorite example is i think its arguably theres no regulator who did a worst job in the crisis than the new york Federal Reserve. People want to detail their various failings during the crisis. What did we do after the new york fed failed tremendously . We gave their president a promotion to treasury secretary. Good for him. You can screw up. You can not Pay Attention. You can not regulate and well never hold you responsible. Of course to me if you want to have a system where theres monitoring thats effective, people who put their own money at risk, who lose their jobs and go out of business will have farther greater incentives to Pay Attention to the system. Also a quick point some of the argument about homeownership that housing is save. Youre seeing a 5 year moving of house prices back to 1890. The point here is you see pretty wide springs in housing. So the argument that is essentially a save asset that always performed well and you will never lose money has not been true. Its never been true. Its a risky investment. Thats not say. All investments arent risky. You shouldnt go into it saying its going to be a win with no problems. So wrap up i will skip over some of the borrower protection issues and doddfrank. I also want to make a quick point. This chart is credit score of the borrower credit card risk to value. Were not talking prepayment penalties or crazy features. What you see is the scores are normalized so in the far right corner at the top where it says 1. 0, that is probably the prime. That is a prime borrower who puts down a sizable down payment and Everything Else is normalized as a multiple of that so in the far of the corner we can see that borrowers that have ltvs over 95 that have ficos under 580 are eight times more likely to default than borrowers who put a sufficient amount of equity down. The point is despite all the talk, kevin talked that qm does nothing about ltv or fico. Almost all of the attention in doddfrank

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