Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

 

Yesterday we got rolling on the consequences of HR 3221, the Housing and Economic Recovery Act (HERA) of 2008 (this Reuters summary is as good as any).  Yes, it is a big deal: a huge deal. 

 

 

We’ve seen that it completes a fundamental revolution within the financial system, a financial and regulatory coup that inaugurates an era of banking on value.

 

If everybody’s regulated, then the next conclusion follows:

 

5.         Everybody needs a license now.

 

It’s been evident that the principal-agent risk inherent in loan originators being paid cash up front, and lenders taking risk over time, risked bad lenders making bad loans.

 

I’m doing this for your own good

 

We knew that mortgage brokers will need licenses too, and this legislation establishes uniform licensing and registration of all mortgage originators, and enhances Truth In Lending disclosures. 

 

Bringing all the originators under one regulatory jurisdiction is as necessary today as creating a national police force was back in the Roaring Twenties.  As I wrote some months back:

 

Back in the good old gangster days, police forces had their jurisdiction end at the state line, inspiring all those wonderful movie scenes of the fugitive racing across the wooden railroad bridge in hopes of reaching sanctuary.

No law beyond the Nevada border

 

Now the regulatory and licensing jurisdiction goes as far as capital goes – from sea to shining sea.

 

6.         The Bank of Glass is halfway to its establishment

 

A week ago, over at Recap, I published State of the Market 10: The Bank of Glass, with this introduction:

 

Up and down Wall Street, each quarter’s close brings a new sound of breaking glass, as institution after institution takes new rounds of writedowns. What shatters with each new revelation isn’t just institutional capitalization, but rather the investors’ trust in the reliability of their investees and financial intermediaries. How could writedowns of this scale occur overnight, after repeated management assurances? Just how fragile are these portfolios, anyway?

 

Do transparent financial structures make institutions fragile?

 

In State of the Market 7: Banking on Value (April), I wrote:

 

After Bear … the rules [will require] much broader oversight of financial institutions, and much more granular information concerning their investments.

 

In the world after Bear, with the Fed banking on value, if you want to bank, you’ll need defensible values.

 

Once upon a time, opacity was an asset, for it bred the serenity of ignorant trust. Today, both regulators and capital markets are driving everyone toward full transparency – yet a bank made of utterly transparent glass is fragile, if investors get frightened by what they now can see.

In the future, all banks will be made of glass – everywhere transparent at all levels. To avoid brittleness, to keep from frightening the capital markets, such a bank of glass must be able to withstand scrutiny at both a macro and granular level.

 

I imagined the Bank of Glass, with transparent granular scalability, as in this metaphor:

 

All the detail’s there, if you can just see it

 

If you want a metaphor for post-Bear reporting, imagine Google Earth. Starting from the ultimate global perspective, with the press of a mouse key one can zoom in on any contingent, any state, any town, even any street. As one zooms, the high-level resolution blurs and the program pauses, only to be replaced by lower-level, higher-detail resolution, and down and down until, from the same continuous overlaying collage of photographs, you can see a photo of your own front door. Investors will want the same thing: every property, every position, every asset, every projection, every rollup, available in as much or as little financial detail as required.

 

Zoom in and you can spot the problems

 

Reporting has to be scalable, which requires a lot of housekeeping work:

 

Scalability of reporting means that whenever two assets are linked by a common money source, no matter how far removed, somebody somewhere brings them both into the report. For apartments, this is always done through very large databases or spreadsheet models that use an approach similar to the following:

 

* Start with property operating statements.

* Add financial information and debt payments and accruals.

* Add cash waterfalls, participations, and contingencies.

* Convert the results into streams of flows for each tranche of the capital stack.

* Along the way, provided exploded calculations, where all steps are visible and auditable.

* Roll up the asset-by-asset results in a manipulable way.

Effective with HERA, the Bank of Glass is the best bank to live in.

 

7.         The LIHTC will also be more efficient, and more responsive

 

Space does not permit me to list all the changes to the Low Income Housing Tax Credit: I’ll return to them in future posts.  What mattes right now are the principles that underlie the fistful of improvements, which include:

 

Flexible, for hands-on underwriting

 

* Even more flexibility for states in allocating credits.

* Greater liquidity in LIHTC, with the demise of the recapture bonding requirement.

* Expands eligibility to include previously snubbed asset clusters (like Section 8 Moderate Rehabs)

* More certainty around credit percentages.

* Greater utility (the LIHTC is now exempted from the Alternative Minimum Tax, which was the gorilla in the room of LIHTC reforms).

 

We LIHTC technicians, who’ve sweated over these proposals for literally a decade (some of them longer) –

 

This stuff isn’t rocket surgery, you know

 

– are now agog at what’s been enacted.  This is the most sweeping modernization of LIHTC since 1993 – long overdue, and most welcome.

 

8.         Can you say ‘trust fund’?

 

Baby, I hope it’s a big trust fund

 

Finally, over three years from when Congressman Frank first introduced it, the National Housing Trust Fund is established, not as a half-tithe on profits but instead 2.73 basis points [65% of 4.2 basis points, the other 35% of which goes to a Capital Magnet Fund – Ed.] of every loan made, although in the first few years, a large chunk of this money flows back to FHA as an ‘insurance’ premium for the $300 billion loan purchase commitment.

 

Although the Trust Fund is notionally administered by HUD, in fact it will be allocated on a needs basis out to the states within twelve months of enactment – and this is one deadline I assure you HUD will hit, with fifty state governors clamoring for the money.  The states will designate an entity to establish an allocation plan for the Trust Fund, just as the states now allocate HOME, CDBG, LIHTC, and tax-exempt bonds.

 

Housing Trust Funds!

 

[Continued tomorrow in Part 3.]

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