Housing reform legislation: yes, it *is* that big a deal: Part 3, the future
[Continued from yesterday’s Part 2 and the previous Part 1.]
While the main consequences of HR 3221, the great big deal known as the Housing and Economic Recovery Act (HERA) of 2008 (this Reuters summary is as good as any), are the financial and regulatory coup that completes a fundamental revolution within the financial system, changing both the GSEs specifically and the capital markets generally (into banking on value), there are even more consequences – important ones:
Serving up banking and GSE reform with all the trimmings!
9. Technical corrections will abound
This legislation is massive.
We landed it, but what have we landed?
It’s far-reaching. It’s complex. And it was put together under enormous pressure, by people who were working against clocks both economic and legislative.
“I’m just a legislative cook”
Guaranteed, there are going to be mistakes – technical flaws.
These will include:
Incorrect cross-references. You’d be surprised at how often section references are just wrong – they point to nowhere, or to the wrong subsection.
It was here when we designed it
Very quickly – it’s called morning-after proofreading – everybody will realize the citation is wrong, but its fixing requires a legislative amendment.
Dueling ‘notwithstanding anything to the contrary’ phrases. At least in my experience, most legislation is written in an intellectual vacuum – the drafters know of some laws that bear on the subject they’re legislating, but other laws touch on the subject of which they are unaware.
“I know something about this legislation you don’t know!”
Loopholes. Oversights that allow people to get away with things the legislation was trying to prohibit, or that enable people to combine provisions to achieve an unintended and grossly over-generous result.
Normally technical-corrections legislation gets passed within a few months of original enactment, and with little opposition. But then, normal is not a state in
It’s on my Congressman’s desk – how about yours?
10. LIHTC pricing will be better long-term … but in the short term, chaotic
On balance, this legislation is great for the Low Income Housing Tax Credit.
I chaired two committees at once
Not only does the Credit retain primacy of place among Federal housing resources, it is streamlined, with the states granted ever more discretion in allocation and administration.
Also, there will be more LIHTC around: the per-capita amounts are boosted for the next couple of years, and the states now have the flexibility to give any property a 30% basis boost previously reserved only for Difficult to Develop Areas (DDAs). I expect that some states could decide that, for 2008 at any rate, their whole state is a DDA and all the properties get a 30% basis boost.
[Full disclosure: my for-profit consultancy Recap is an advisor to the
This won’t increase the Federal tax expenditure – it’s still capped at the same amount – but will allow the states to concentrate their attention.
Just add basis boost and stir
All that is for the long term. For the short term, there’ll be more LIHTC in a market that’s already got an excess of supply over demand. As I wrote last March, in What price a LIHTC ticket?
Traveler: “How much does a ticket cost?”
Airline: “How badly do you want it?”
Any idea when the LIHTC will take off?
When demand falls, prices also fall until there emerges a new body of consumers who support a new lower price. Where will they come from, and at what level will prices stabilize? While prices are falling, what does that mean for current participants, especially lenders and investors?
Normally, when prices are falling, you don’t add to supply. Yet that’s what Congress has done, for what may well be very good reasons. Even as prices are falling, the boost in total credit amount, coupled with the waiver of recapture bonds decreasing the barriers to sale, probably means that LIHTC equity prices will weaken even further. Yields will rise.
AHI blogs: where the future begins tomorrow!
11. House prices will firm
Moving to provide liquidity and loan-paying support to a broad range of home owners, major assistance is provided across the spectrum, from current owners to new buyers.
Pots of gold under many homes’ rainbows
A homeownership tax credit (really, an interest-free loan run through the tax code). Middle-income households (anyone below $150,000 married filing joint) can tap a one-time tax credit of up to $7,500 for the purchase of a first home. Homeownership tax credits work (as we’ve seen in Washington DC), and although this one amounts to a 15-year interest-free loan rather than a direct transfer, for our purposes it’s functionally equivalent to a $7,500-per-home injection of hard equity, with five beneficial consequences, as I posted three years ago:
1. Provides accessible capital.
2. Places the owner in first-loss position.
3. Shows the borrower has some financial wherewithal. (A credit works better for this than a grant, since the borrower has to bring the cash to the closing table, and gets the credit only when he or she files a tax return.)
4. Gets the borrower’s undivided attention.
5. Demonstrates that the borrower has an investment mindset.
States secure $4 billion of foreclosure-repositioning grant money. As we’ve seen, abandonment and blight are value destroyers even more than foreclosure is.
The kind of thing that signals, nobody’s home
What’s needed are solid citizens occupied solid homes, and when a property is abandoned, it has to be secured, renovated, and then re-sold:
Local communities that are burdened with maintenance of abandoned properties would have access to nearly $4 billion in federal grants to buy and repair those homes.
That’ll go a long way to upholding prices and re-establishing liquidity in neighborhoods threatened with blight. So will this:
One-time boost in tax-exempt bond authority. Bonds that are tax-exempt sell for a lower interest rate, which state housing finance agency lenders can, should, and usually do pass through to home buyers. Now they have much more to work with:
Local governments would have authority to issue an additional $11 billion of tax-exempt bonds to refinance shaky loans
If today’s thirty-year taxable fixed is 6.40% [Visited 27 Jul 08 – Ed.], and the corporate tax rate is basically 34%, the equivalent tax-exempt rate is 4.2% [Calculated as 6.4% x (100% - 34%) – Ed.], and the difference in debt service is 22% (7.51% constant taxable, 5.89% tax-exempt) assuming the same thirty-year term.
A 22% drop in occupancy costs could be equivalent to a 27% boost in sustainable home price [100% / (100% - 22%) – Ed.], which is a big underpinning.
Holding up home prices until the financial ground restabilizes
Counseling and helping borrowers. When people get into financial trouble, especially with a large purchase like an owned home, they need assistance. Now there’s significant money available to homeownership counseling:
$200 million would be offered to foreclosure-prevention programs
It helps to have somebody to talk through the math
12. HUD’s demise into irrelevancy is now inevitable
When Hurricane Katrina hit, causing the biggest localized housing crisis in America’s last decade, HUD was nowhere; FEMA took the lead, and when New Orleans needed to be rebuilt, we observed the Case of the Vanishing HUD.
When the GSE scandals broke, to its eternal credit, HUD’s Office of Federal Housing Enterprise Oversight (OFHEO) did the digging and made the case in the early days (complete early-AHI archive here), eventually issuing the report that blasted Fannie Mae, so thoroughly the company never rebutted a single charge.
OFHEO set you up, now I administer the coup de grace
As its reward for this exemplary service, HERA abolishes OFHEO, transferring all of OFHEO’s powers to the newly created Federal Housing Finance Agency, and granting FHFA many more powers as well:
That ’s FHFA, Seppi, not FIFA
Meanwhile:
FHA’s loan limits are now aligned with the GSEs, rendering FHA more likely a backstop than an alternative.
Fannie Mae, Freddie Mac and FHA would be permitted to purchase loans as large as $625,500 in high-cost areas — a big increase from the $417,000 cap typically in place.
The new rescue money (in the affordable housing trust fund) flows through HUD’s hands and is decided by the states.
OFHEO is abolished (as we saw above), with a pat on the back for a job well done.
Great job … not hit the showers
At this point, what is there for HUD to do? All of its functions have been wholesaled, most of them to the states, except for EEOC (which could easily go to the Justice Department) – and the legacy public housing inventory, which needs a bold Gordian-knot-cutting solution and turn into the essential housing authority, one that is no longer micromanaged by HUD.
“Everything not mandatory is forbidden.”
So here’s a final prediction:
By 2012, HUD will be gone as a Cabinet branch.
Whether this is good for the country’s affordable housing is something I can take up in future posts; for now, we can already hear a future Congress having the last word.
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