Tag Archives: free market

Dodd-Frank Repeal Unappealing for Homeowners

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photo by Gage Skidmore

Congressman Jeb Hensarling

The Hill published my latest column, Why Repealing Dodd-Frank Is Unappealing if You Own a Home. It opens, 

President Trump has made it clear that he wished to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act. Just two weeks after his inauguration, he issued an executive order to get the ball rolling by means of agency action, an effort that will be led by the Department of the Treasury. Trump will have lots of allies in Congress as he pursues this agenda. A recent memo by House Financial Services Chairman Jeb Hensarling (R-Texas) to his committee’s leadership team outlines a legislative path that leads to much the same goal.

One of the key components of the Dodd-Frank regulatory regime was the newly-created Consumer Financial Protection Bureau (CFPB). The bureau is responsible for administering a range of consumer protection regulations, some of which predate Dodd-Frank and some of which were mandated by it. Homeowners should sit up and take notice because a lot of protections they can now take for granted will be stripped away if this push is successful.

Many of these regulations protect homeowners as they obtain mortgages for their homes. Others protect homeowners over the life of the mortgages, particularly when they are having trouble keeping up with their mortgage payments because of those common life events that still knock us for a loop when they happen to us: job loss, divorce, medical bills, a death in the family.

Hensarling’s memo makes clear the extent to which he wants to weaken the CFPB. Among many other things, he wants to eliminate the bureau’s consumer education functions, bar it from commencing actions involving unfair, deceptive or abusive acts and practices, end its practice of tracking consumer complaints, and stop if from monitoring and conducting research on the consumer credit market.

Before the financial crisis, homeowners suffered from a range of abusive and predatory behaviors that were prevalent in the mortgage industry for years and years. Lenders would lend without regard to a borrower’s ability to repay a loan, so long as there was sufficient equity in the home to make the lender whole after a foreclosure. Dodd-Frank’s ability-to-repay rule keeps lenders from doing that now. Lenders would make loans that had large balloon payments at the end of the term, forcing unsophisticated borrowers to refinance with all of the fees and costs that that entails. The lenders would look at those refinancing costs as another profit center. Dodd-Frank’s qualified mortgage rule banned those abusive balloon payments for the most part.

While Hensarling claims that Dodd-Frank “clogs the arteries of capitalism,” he seems to forget that unfettered capitalism nearly gave us a fatal heart attack just 10 years ago, when the subprime mortgage crisis led us to the brink of a second Great Depression. He seems to forget that predatory mortgage lending is not only bad for the individuals affected by it, but also for the housing market and economy in general. Housing prices did not just fall for those with unsustainable mortgages—they fell for all of us.

The push to get rid of the CFPB is not being driven by the consumer finance industry. The industry has learned to live with the bureau. It has come to see that there are some benefits that accrue from primarily dealing with one regulator, in place of the patchwork of regulators that was the norm before Dodd-Frank. Rather, the push is being driven by an unfettered free market ideology that is out of step with the workings of the modern economy.

Getting rid of the CFPB will be bad for homeowners. They will no longer be able to assume that a mortgage they receive is one that has payments they can make month-in and month-out. They will need to treat lenders as predators because predatory lending will certainly return to the mortgage market. Caveat emptor.

The High Cost of Living in NOLA

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photo by Ken Lund

Occupy.com quoted me in For Struggling Renters in New Orleans, Hope May Be Coming A Bit Late. It opens,

Twenty-four-year old Stuart Marino is a finance major at University of New Orleans with $8,000 in student loan debt and 33 credit hours until graduation. But the alternative to obtaining that diploma is worse. As statistics show, those not having a college degree are much more likely to remain poor. Marino was not fortunate enough to have been born a decade earlier. Then, tuition at UNO was half of what it is now. During Republican Governor Bobby Jindal’s term, from 2007 to 2015, tuition at Louisiana public colleges skyrocketed due to massive budget cuts.

Despite having a job, Marino says he spends more than 30 percent of his income on rent and utilities. He would not be able to cover the cost of a $1,000 medical emergency. Indeed, he has delayed getting his car fixed, something vital to reaching his job and school.

“Fixing my car would be something I would be doing with that $700,” he said, referring to the monthly rent.

Marino’s story personifies what many people here and nationwide have experienced over the last decade as rents in cities and even in urban areas of less than 1 million have soared, exacerbating income inequality while disproportionately affecting racial minorities, the less educated and millennials.

In the last year alone, rents in the U.S. have increased 3 percent, according to Apartment List. In New York City and San Francisco, the median rent has climbed to $4,500 and higher. The cost of living in these cities can be understood as the price, however astronomical, of living in one of the country’s major economic centers, where industries like finance and tech pay high salaries.

But in smaller cities such as Miami and New Orleans, both of which count on tourism as a major source of revenue, more than a third of residents devote 50 percent of their monthly income to rent and utilities, according to Make Room, a campaign by the non-profit Enterprises Inc. that aims to create more affordable housing.

Factor in stagnant wages, a low supply of multi-unit housing, and higher credit requirements post-Recession, and the number of Americans paying 30 percent or more of their gross income on rent and utilities has risen by 22 percent in the past decade. This goes against what financial experts recommend: that people spend no more than 30 percent on basic monthly costs in order to have a cushion in case of catastrophic events like a job loss or a medical emergency.

Working harder is, in most cases, not an option. According to last month’s Bureau of Labor Statistics report, the number of Americans involuntarily working part-time has reached 6 million, and is showing “little movement since November.”

The Housing Crisis in New Orleans

New Orleans has undergone many changes since Hurricane Katrina devastated the city in August 2005. And not all of them have been positive. Sociological studies show that renters are more likely to remain displaced than homeowners. In areas of the city like the Lower 9th Ward, where most residents rented, fewer have returned since Katrina than in neighborhoods where home ownership was predominant – even including those areas that flooded. For those who have returned with few economic resources, many face a long wait for housing; according to the Housing Authority of New Orleans, in September 2015 more than 13,000 people, disproportionally African-American, were still waiting for housing vouchers.

Changing the current housing reality is akin to shoring up the foundation of a home; it can be done, but not easily. “Fundamentally, building housing is costly,” David Reiss, a professor at Brooklyn Law School and an expert in real estate and community development, told Occupy.com.

A free market economy incentivizes people to invest in something only in exchange for profit. That leaves the job of providing affordable housing up to government, but municipalities have moved away from programs establishing dense urban public housing.

Reiss pointed out that vertical expansion could alleviate high rents in urban areas. But many residents, particularly those in historic neighborhoods, don’t want to see large buildings built in their neighborhoods; it’s a NIMBY, or “not in my backyard,” conundrum.

The Unzoned City

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Matt Festa has posted an interesting, short article, Land Use in the Unzoned City, to SSRN. He writes,

The popular conception that Houston is unzoned because it is some sort of ultra-Texan free-market landscape is not accurate. Houston’s land use is in fact highly regulated. While no Houston ordinance explicitly uses the “z-word,” and its rules for the most part don’t prescribe limitations on use, there are numerous land use regulations that, in any other city, would be part of the zoning code. Houston defines certain areas as “urban” versus “suburban,” with different regulations.There are laws prescribing minimum lot sizes, which in turn restrict density. There are setbacks from the street, buffer zones for development, and regulated street widths. There are other laws that affect land use, such as the new historical preservation ordinance, which allows citizens to petition the council for designation as a historic area, which comes with additional restrictions. These are all government measures that, in my opinion, operate as “de facto zoning”— they prescribe different land use rules based partly on geographic location. And even these rules pale in comparison to the extensive regime of private covenants and deed restrictions that govern a majority of the property in Houston. (17)

Festa explains that this lack of zoning may have some partial explanations that have to do with the culture of the city. But he finds a more compelling explanation in the ban on zoning contained in the Houston City Charter. This ban, which can only be overturned by referendum, has been challenged three times but zoning supporters have come up a bit short each time.

Festa is certainly correct that land use scholars (Edward Glaeser, for instance) use Houston as a foil to communities that heavily limit new construction with restrictive zoning provisions. So Festa’s thesis is an important one that I hope he develops in a longer article. Until we determine how much less restrictive Houston’s land use regime is than other American cities’ formal zoning ordinances, we can’t fully understand the interaction between restrictive land use policies and the housing crisis affecting cities across the country.