Introducing PD&R’s Special Advisor on Housing Finance

Introducing PD&R’s Special Advisor on Housing Finance

Richard Green, Senior Advisor on Housing Finance in the Office of Policy Development and Research.

For my whole life, I have had passions for cities, data, and the combination of the two. As a boy growing up in La Crosse, Wisconsin, it would thrill me when my parents would take my brother and me to Minneapolis for a weekend, in part because of the fun things we would do, but also just because I liked being around (what I considered to be) tall buildings and crowds of people.

At the same time, I would every year await the annual release of the World Almanac (sort of a small, paper version of Google) so I could see the rankings of cities by population. With it being the 70s, I was as a Midwesterner with family roots in New York always disappointed that the cities of the West and South were overtaking the cities of the North and East. In a current world where New York competes with London as the most vibrant and desirable city in the world, it is hard to imagine that it lost more than 800,000 people during the 1970s, the largest population loss felt by any city in one decade in American history. Of course while NYC has come back with a vengeance, the general trend of population moving from North and East toward South and West continued. The reasons for the trend continues to fascinate me.

So I now find myself very fortunate to have a permanent job, as a professor at the University of Southern California, that lets me think about cities and data every day, as well as a temporary job, as Senior Advisor for Housing Finance at HUD, that lets me think about—and even better, make policy suggestions about—the flow of housing finance to cities, suburbs, and rural areas—as well as the state of housing in the United States.

I am particularly excited this year to be working a number of issues that could help people in the U.S. have better housing outcomes. They include: access to credit, fair lending, housing affordability, housing finance for seniors, and shared appreciation mortgages.

With respect to access to credit, we know that under current underwriting guidelines, many people who are excellent credit risks are not able to obtain mortgages. The reason we know this is that the default rate on loans from recent vintages is vanishingly small. While it is worth debating the optimal mortgage default rate, both from financial and moral viewpoints, the optimal default rate is not zero.

Beyond the fact that the credit box is, in my view, too tight, it also contains standards that I consider to be arbitrary, and not grounded in data. These arbitrary standards mean (1) some potential borrowers that are better risks than those who are being approved now are being rejected and (2) African-Americans and Latinos are less likely to be able to obtain mortgages. To me, this is unacceptable.

The third piece of this puzzle is pricing. At the same time lenders are making loans on which they are realizing nearly no losses, they are also charging historically high costs for those loans. In light of the fact that current mortgage rates are low by historical standards, this may seem surprising. But the spreads between Ginnie Mae securities (the amount investors get paid for mortgages with no default risk) and mortgage rates are extraordinarily high at the moment. Lenders are getting large margins while having low costs. The mortgage business must, of course, be profitable, but it needn’t be excessively profitable. If we look at the period before 2002, spreads between Ginnie Mae’s rates and consumer rates were 50 to 60 basis points lower, or the equivalent of $1,000 to $1,200 per year on a $200,000 house — a material difference to the median U.S. household, which earns around $50,000 per year.

All of these issues are particularly relevant for first-time homebuyers — people who tend to be younger. But there are two other groups for whom mortgage finance policy is critical: those who are still upside down on their mortgages (house prices in Las Vegas, for example, are still more than 30 percent lower than they were at their peak), and those with mortgages who are about to retire. As everyone reading this knows, we are on the cusp of the largest wave of retirements in American history. But unlike members of my father’s generation, nearly all of whom had paid off their mortgages before age 65, a substantial number —perhaps a majority of retiree homeowners— will still have a mortgage balance at age 65. We need to think about how best to allow people to stay securely in their homes.

Bottom line—I am thrilled to be here at HUD’s Office of Policy Development and Research, and look forward to my remaining 9 months.