PolicyCast: Unlocking the Data Driving Housing

Kirk Willison, Arch MI’s Vice President for Government and Industry Relations:

If a congressional committee is planning a hearing pertaining to housing, it’s a good bet staff members are making calls to the Urban Institute’s Housing Finance Policy Center for insight. The Center counts on an array of progressive housing policy voices, such as Jim Parrott, Ted Tozer, Mike O’Neill and Janneke Ratcliffe to undertake research, to write white papers and appear as witnesses before those same committees.

In 2013, the Center was founded by Laurie Goodman. It’s only natural that Goodman would create a Housing Finance Policy Center reflecting her own image, that of data-driven analyst and economist with more than 30 years of experience on Wall Street.

As the Housing Finance Policy Center prepares to celebrate its 10th anniversary, the Arch Mortgage Insurance PolicyCast sat down with Laurie to discuss the Center’s priorities and how housing finance has changed since its founding. Goodman, who is a Member of the Board of Arch Capital Group, the parent company of Arch Mortgage Insurance joined us from her home in New York.

Willison:

Laurie Goodman, it’s great to have you on the Arch Mortgage Insurance PolicyCast. Delighted to have you here.

Laurie Goodman, Founder, Urban Institute:

Thank you so much for having me. I’m very excited.

Willison:

You are about to celebrate the 10th anniversary of the Urban Institute’s Housing Finance Policy Center. Why was the center established?

Goodman:

The Center was established in the aftermath of the financial crisis in 2013. And what we found is that a lot of public policy decisions were made without regard to the data just because the data wasn’t available. I spent 30 years on Wall Street, and I gave data to a lot of government people, a lot of advocates, just because the data wasn’t available to them. On Wall Street we’re able to pay for very good datasets, and we had the data easily available. I realized that that data could be used for better public policy decisions. The Housing Finance Policy Center was founded with the idea that to quote, I believe, Winston Churchill, “everyone is entitled to their own opinions, but they’re not entitled to their own facts.” With better data, you could make better public policy decisions and the democratization of that data could be critical.

Willison:

You know, speaking on the topic of anniversaries, it’s kind of hard to overlook a couple of them: The 15th anniversary of the Lehman Brothers collapse and the 15th anniversary of Fannie and Freddie being placed into conservatorship.

Goodman:

Yes, we had a conservatorship breakfast with some economists in New York a week or so ago to celebrate that.

Willison:

It’s a hard thing. Maybe we mark it as opposed to celebrate it. But is the housing finance system safer and sounder as a result of the crash that took place and the steps that the government has taken?

Goodman:

Absolutely. Mortgages are of much, much better quality. Actually, I would argue, if anything, we’ve gone too far in the other direction, where access to credit is more limited than it should be in reaction to the great financial crisis.

Willison:

So, Laurie, actually on that subject ― broadening credit access, it seems to be a regular theme of the research that’s done at the Urban Institute. Recent papers are focused on manufactured housing, the ramifications of higher interest rates on lower-income borrowers, how lower-income families could benefit from down-payment assistance … Do you think this is a particular sweet spot in your research?

Goodman:

Yes, it is. It’s something that we’ve been focusing on since the very inception of the Center. And there are a lot of things that, as you know, we’ve been talking about for a very long time that we’re that we’re glad to see finally happening, such as the incorporation of rental payments into the mortgage origination process. I think that that’s absolutely critical. I think one thing that’s been sort of ignored and needs to be talked about a lot more is the impact of our improved loss mitigation.

Willison:

And the Urban Institute was a leader in bringing together a wide array of individuals ― a wide array of groups — in the wake of the pandemic to study that very topic and to find out how you deal with the loss mitigation. What were some of the functions of that effort and what the results were?

Goodman:

We formed the mortgage servicing collaborative a number of years ago to focus on servicing issues and bring together stakeholders, including lenders, servicers, consumer groups, civil rights leaders, researchers and policy makers to develop an evidence-based understanding of key factors ― to develop and analyze possible solutions and implications. A couple of things: We highlighted the fact that cumbersome default servicing can serve as a constraint on access to credit. We highlighted issues in government loan modifications in a higher-rate environment, which is finally being addressed. We highlighted the high cost of FHA’s foreclosure and conveyance processes and they’ve taken steps to address that. We’ve highlighted the need for uniform mortgage data standards on the servicing side of the business. Those are sort of the key things that came out of our mortgage servicing collaborative.

Willison:

One of the issues that arises as a concern when we went through the pandemic and interest rates fell precipitously is a lot of low-income people didn’t take advantage of refinancing. Going forward, what can we do about that?

Goodman:

There are two reasons why lower-income people didn’t take advantage of refinancing. One of them was that you had to re-qualify for the refinancing. They made sure your income was apt to continue, etc. That makes absolutely no sense whatsoever. If a GSE already has the risk on the mortgage and somebody’s able to get a lower rate on that mortgage, it doesn’t matter if their job is apt to continue or not, they’re going to be in a better condition than they were before when they have a lower rate on that mortgage. So this requalification makes no sense. The other reason that lower-income borrowers, a lot of times, weren’t able to take advantage of it is actually the fact that originators were capacity-constrained. If you’re capacity-constrained, you tend to do your larger, more profitable loans first, and that happens in every refi wave and then as the wave begins to wane, you then begin to do your less profitable borrowers, and, obviously, with automation [the] capacity constraints ease over time.

Willison:

Looking toward the future, is there a way to rectify that going forward?

Goodman:

To the extent that you eliminate the need for a lot of documentation on refis, you can process those refis faster and get more people through the pipeline. And I think that that’s the obvious answer.

Willison:

A while back, [the] Urban [Institute] did a study that forecast that the Black homeownership rate, which is already significantly lower than the white homeownership rate, 30 percentage points or so could actually further decline by about 2030. What policies should be taken up that would address that concern?

Goodman:

There are a number of things that can be done. I’m actually going to group this into two buckets. The first bucket is what we are already doing, which we could do more of obviously, which is holding the probability of default constant trying to qualify more borrowers. So, for example, including rental payments, which is particularly important to those that don’t have deep credit history. That is being done now as sort of an add-on to the process. It is not an integral part of the process. But I think that’s real important. Using bank statements to be able to get a better handle on income. Right now GSEs require two years of steady income in the same job or a job in the same profession. Gig income doesn’t count fully, so if you are an Uber driver who sometimes drives five hours a week and sometimes drives 20 hours a week, you’ll be lucky to get credit for five hours a week. If you are a teacher who teachers summer school two years out of three but didn’t do it last summer, you’ll probably lose that income. Looking at bank statements to get a more consistent picture of someone’s income rather than ad hoc rules could be another game changer, including family members who have a history of contributing to the housing payment, either the rental payment or the mortgage payment, not necessarily on the mortgage, that income is counted to a very limited extent. Again, using bank statements you could count that income more fully. So those are some of the things that you can do to qualify more people holding the probability of default constant. I actually think the real game changer is increasing access to credit by being willing to take on just a little bit more risk. When you think about what’s happened to the loss mitigation process, it has improved so, so dramatically. Mortgage modifications are much better than they were during the financial crisis. We’ve got a whole forbearance infrastructure that is tied into the loss mitigation waterfall, which didn’t exist prior to the last five years. And that COVID-19 forbearance actually grew out of the disaster loss mitigation toolkit, which in turn grew out of the programs during the great financial crisis, but COVID-19 I think was a game changer in terms of the loss mitigation toolkit and the introduction of the use of forbearance. They had unbelievably good results from COVID-19 forbearance in terms of relatively few borrowers progressing to foreclosure. You sort of say, well, gee, that’s very robust home price appreciation that solves all problems. And it does, but even so, when you look at the numbers, even if you look at areas with less robust home price appreciation, you see the same result. And that’s now become a permanent part of the GSE toolkit, where borrowers are entitled to six months’ forbearance with an attestation that they’re challenged, and the COVID-19 waterfall applies. I think that’s very powerful. What that does is it cuts the transition rate from serious delinquency to home loss or foreclosure and therefore cuts losses considerably. If you cut the [transition] rate by half, you cut losses by half almost by definition, and that allows you to widen the credit box at the front end and I don’t think people are thinking in those terms.

Willison:

Under Director Sandra Thompson at the FHFA, they’ve really made a dramatic change in priorities. The GSEs are no longer focused on exiting conservatorship, but instead they’ve been told to emphasize equitable lending. Your team at the Policy Center has written extensively about this subject, but what do you think the GSEs ought to be prioritizing?

Goodman:

I think they ought to be prioritizing equitable lending as they are. The one thing about the GSEs is that they have got fabulous technology. They’re able to look at bank statements. Actually think about what has to happen to be able to consider rental income in the mortgage application process. Well, you need to know you have to be able to parse those bank statements to know if the borrower has been paying their rent on time. So, they’ve got fabulous technology and they ought to be harnessing that technology to make better lending decisions.

Willison:

Are you concerned at all that the recent Supreme Court decision that prohibits affirmative action in college admission might kind of bleed over and impact the ability of the GSEs to target people of color?

Goodman:

First of all, there are a lot of ways you can target people of color without explicitly targeting people of color, such as geographic targeting, and most special-purpose credit programs, which are sort of designed to target people of color, actually don’t target people of color — they target communities of color. And so if you do geographic targeting, versus borrower targeting, I think you manage to skirt that Supreme Court issue.

Willison:

You recently authored an article about how independent mortgage banks — non-banks — have surpassed commercial banks in lending to minorities. So what are the implications of that and have non-banks become so critical to minority lending, that they maybe should fall under CRA responsibilities?

Goodman:

Non-banks are absolutely critical to lending to minorities and have been added their impact has been growing, sort of in the aftermath of the great financial crisis banks have pulled back from the mortgage market to a very considerable extent. Over 90% of government lending is now done by non-banks, approximately 75% of GSE lending is done by non-banks. When you look at the credit box that non-banks have, it’s wider than what the banks have, and that’s because a lot of banks impose overlays on the FHA or Fannie or Freddie credit boxes. We don’t lend to borrowers with FICO scores less than x, whereas the non-banks tend not to have those overlays, so they tend to have a lower average credit score than the banks do, particularly in government lending. And they tend to have a higher debt-to-income ratio in all lending than the banks do. So they’ve become much more ingrained and because they don’t have the overlays, they’re absolutely critical to LMI and minority lending. And then when you sort of say, should they be, should CRA be imposed on them? Banks that are subject to CRA are already doing less than non-banks that are not subject to CRA, so I’m not quite sure I see the reason to impose an additional structure on to the non-bank community.

Willison:

Okay, let’s revert back a little bit to the topic of bank mortgage lending. As you say, it’s really dropped off pretty considerably, and the newly proposed Basel III endgame regulation would actually significantly increase risk weightings for mortgages held in portfolio for the highest LTV borrowers of the very largest banks, those over $100 billion. How might that impact bank lending going forward?

Goodman:

When you look at who these borrowers are that are impacted by the changes in the capital requirements, they’re more heavily LMI borrowers, more heavily borrowers of color, absolutely no surprise, and what it will do is both curtail the amount of this lending that banks are willing to do. It will also raise the cost to these borrowers. It’s got fairly negative implications. We are actually out with a piece on this; the release of recent research is coming by the time you have this podcast out.

Willison:

Does it make sense for there being different weightings on mortgages, depending on whether they’re held by mega banks, regional banks, community banks or the portfolios of the GSEs?

Goodman:

It does not make sense to have different risk weights depending on who it is held by. I think the interesting thing about these risk weights is not only on high-LTV mortgages, are they higher than the existing risk weights, but they’re also well higher than the risk weights that are prescribed by Basel. They’re basically Basel plus 20% across the board.

Willison:

So what would be your guidance to bank regulators between now and November 30 when the comments are due?

Goodman:

There is absolutely no reason for these increased risk weights on the higher-LTV loans. Roll them back. In addition, think about the effect of the of the capital requirements on the entire mortgage market. So it’s not just the effect on bank lending itself, but banks are very important warehouse lenders to non-banks that provide the bulk of the mortgage credit at this point, and the increased capital requirements on the warehouse lines of credit could turn out to be fairly detrimental to the mortgage market. And in addition, the treatment of MSRs has become increasingly punitive, and that too will hurt the execution in the mortgage market. So think about the total picture.

Willison:

Final question, Laurie. If you were America’s housing czar, what would be your top three priorities?

Goodman:

Actually I have two top priorities. Increasing housing supply and increasing access to credit. And I think increasing housing supply is, is just a huge issue. That’s what drives up home prices. It drives up rent. The issue with housing supply is that so much of what goes into high housing costs and limit supply is not a federal issue. It’s a state and local issue. So for example, zoning or building codes, the high costs are basically state and local issues. The high costs of labor and construction. That’s partly an immigration issue because so much of our construction labor force is foreign-born, about a third versus 17% of the overall labor force. But there are things you can do. Financing is a federal issue and there are things that the federal government could do to increase supply. For example, looking at how the Agencies look at manufactured homes, particularly chattel loans and having a federal program for personal property loans or loans where the borrower does not own land I think could be a game changer in that area. Relooking at how we do renovation financing because so much of the U.S. housing stock is aging and when they need major renovation. The denial rate on renovation loans is very high. The loans are very cumbersome, sort of rethinking and reengineering that process could be very important, but a lot of the housing supply issue is a state and local issue. And it’s very hard for the federal government to do anything. They could work harder to tie more funding to increased density. I mean land costs are so high because of zoning issues. If you want this money, you’ve got [to] allow more density. Accessory dwelling unit (ADU) production has really increased in California and after they have allowed for ADUs as a matter of right but they haven’t just allowed for ADUs as a matter of right. They’ve also waived the setbacks and some of the parking restrictions and a lot of other things to make it work. So thinking in those terms could make a big difference in terms of housing supply.

My second issue is access to credit. And there I really think that we have improved the loss mitigation process so substantially that we should well allow that to filter into the front end and allow a marginally higher probability of default, in which case you extend lending to a lot more lower-income borrowers and borrowers of color because those are basically the borrowers that are being squeezed out by today’s tight credit.

Willison:

Laurie, thanks very much for taking the time today to chat with us.

Goodman:

Thanks very much for having me.