Affordable Housing Institute : US

[Continued from Part 1 and Part 2.]

Part 3: What the report doesn’t say

In what it covers, the report does a fine job, but by its grandiose title, one might be forgiven for thinking it complete and balanced. In fact, it is neither, and although these omissions by no means invalidate its utility, readers need to be warned.

 

HUD-busters!

Here’s where the report needs to be taken with a grain of salt.

 

Take two of these and call me in the morning

1. It sanitizes the US past. As I discussed in DeSoto’s Dryer, Part 3, Hernando De Soto has demonstrated that most of US housing finance arose through normal market forces, with the government serving mainly to rationalize land usage and validate titles that had been claimed through common-law settlement (such as ‘tomahawk rights’).

 

2. It touts the 69% US homeownership rates out of context. Yes, 69% plus is the highest formal homeownership rate in recorded American history (it was probably higher in Colonial times, but most of the homes were uneconomic self-built), but that is no global leader.

 

3. It credits US homeownership to securitization, not conscious policy. Nor is the homeownership rate a direct or even principal outcome of the securitization system. Rather, the slow rise in US homeownership rates over the last fifteen years owes much to the conscious efforts to create first-time homeowners through financial literacy training, down payment assistance, and government-insured loans (e.g. FHA and VA), among other factors.

 

4. It overemphasizes securitization. Securitization is only one of several ways the capital markets (the money store) can monetize portfolios of performing loans. Indeed, the report tacitly acknowledges as such, first indirectly when it cites the apparently poor takeup of securitization outside Western Europe, and second when it presents a menu of ways to create wholesale funding.

 

5. It under-emphasizes origination. You cannot securitize what has not been originated. One would think this self-evident. And in most of the countries the report cites — certainly in Mexico and South Africa, where I have some personal knowledge — there’s no shortage of domestic capital, and no shortage of very talented investment bankers who could securitize pools in a New York minute if there were pipelines of good product. In point of fact, these countries need originators, a species of independent small-scale operators that must grow up from within the country. This is a huge intellectual investment prone to false starts (witness the US in the 1890s!) that doesn’t simply spring into being when ’securitization’ is whispered in the prime minister’s ear.

 

Whack my skull with a battleaxe, and out pops a great idea!

6. It skips over the consumer-protection infrastructure. Consumers have confidence in our system because it is buttressed at many places with government protection:

· Bank deposits are federally insured.

· The major postwar homeownership growth rode on the back of FHA/ VA insurance.

· The Home Mortgage Disclosure Act (HMDA) provides extensive mandatory customer education.

· The Real Estate Settlement Procedures Act (RESPA) similarly protects the exchanges of money.

 

Don’t you feel safe just thinking about it?

7. It ignores rental housing. While American homeownership rates are justifiably applauded, the nation’s real strength is its permanent professional rental sector. In no other nation can one find the quality, diversity, and customer-centrism present in the US residential rental sector. No other nation has large-scale fully professional owners to match US residential REITs. Residential property management in the US outstrips any other nation in my experience. That did not arise sui generis; it is itself a byproduct of a parallel evolutionary saga (worthy of many future blog posts!).

 

8. It understates the role of tax policy and subsidy. Nowhere in the report is there any suggestion of the Federal cash contribution to housing affordability, which I have quickly estimated at greater than $1 trillion US (2006 dollars) and continuing. (The mortgage-interest deduction alone is worth $60 billion in tax expenditure annually.) Nor is there mention of HUD appropriations (odd given the report’s sponsor!), nor of the Low Income Housing Tax Credits, nor tax-exempt bonds, and on and on.

 

9. It ignores the role of state and local government, about which I have posted at length. The US’s three-tier approach to land use and housing policy, although bewildering and at times very frustrating, allows the nation to choose the best nexus for particular housing-related solutions, and encourages parallel evolution as well as idea propagation across jurisdiction.

 

10. It fails to credit appropriate emphasis to the value of ecosystemic diversity. Diversity in a biological ecosystem makes the system more robust; in a financial system, it means greater responsiveness. That virtue, and the value of continuous innovation, is lost in the shuffle of the many pages devoted to the delights and joys of securitization.

 

I don’t know what I’d do if HUD had six lessons!

HUD’s monograph concludes with four lessons [Only four? — Ed. Yep, only four — Auth.]:

Lesson 1: The evolution entails the sequence of shock-response-innovation

Lesson 2: Risk matters and must be managed

Lesson 3: Incentives matter, too

Lesson 4: Multiple options are available to achieve a given policy objective (Page 21)

The report concludes by providing a useful little summary of areas and choices:

 

 

In terms of growing a successful housing finance ecosystem, the report’s broad message could be distilled down to yet another Yogi-ism:

When you come to a fork in the road, take it.

 

Three posts and you’re out!

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