During the past two years, regulators and lawmakers have introduced and adopted new rules and guidelines aimed at curbing the impacts of racial bias on home valuations. But some appraisers and researchers insist these efforts have been based on faulty data.
Conflicting findings from a pair of non-profit research groups call into question whether or not recent actions will improve financial outcomes for minority homeowners without leading to banks and other mortgage lenders taking on undue risks.
The debate centers on a 2018 report from the Brookings Institution, which found that homes in majority-Black neighborhoods are routinely discounted relative to equivalent properties in areas with little or no Black population, a trend that has exacerbated the country’s racial wealth gap. The study, which adjusts for various home and neighborhood characteristics, found that homes in Black neighborhoods were valued 23% less than homes in other areas.
“We believe anti-Black bias is the reason this undervaluation happens,” the report concludes, “and we hope to better understand the precise beliefs and behaviors that drive this process in future research.”
The study, titled “Devaluation of assets in Black neighborhoods,” has been cited by subsequent reports published by Fannie Mae and Freddie Mac, academics and White House’s Property Appraisal and Valuation Equity, or PAVE, task force, which used the data to inform its March 2022 action plan to address racial bias in home appraisal.
Meanwhile, as the Brookings’ findings proliferated, another set of research — based on the same models and data — has largely gone untouched by policymakers. In 2021, the American Enterprise Institute replicated the Brookings study but applied additional proxies for the socioeconomic status of borrowers.
By simply adding a control for the Equifax credit risk score for borrowers, the AEI research asserts, the average property devaluation for properties in Black neighborhoods falls to 0.3%. The researchers also examined valuation differences between low socioeconomic borrowers and high socioeconomic borrowers in areas that were effectively all white and found that the level of devaluation was equal to and, in some cases, greater than that observed between Black-majority and Black-minority neighborhoods.
“That, to us, really suggests that it cannot be race but it has to be due to other factors — socioeconomic status, in particular — that is driving these differences in home valuation,” said Tobias Peter, one of the two researchers at the AEI Housing Center who critiqued the Brookings study.
Contrasting conclusions
Peter and his co-author, Edward Pinto, who leads the AEI Housing Center, acknowledge that there could be bad actors in the appraisal space who, either intentionally or through negligence, improperly undervalue homes in Black neighborhoods. But, they argue, the issue is not systemic and therefore does not call for the time of sweeping changes that the PAVE task force has requested.
Brookings researchers have refuted the AEI findings, arguing that, among other things, their controls sufficiently rule out socioeconomic differences between borrowers as the cause of valuation differences. They also attribute the different outcomes in the AEI tests to the omission of the very richest and very poorest neighborhoods.
Jonathan Rothwell, one of the three Brookings researchers along with Andre Perry and David Harshbarger, said the conclusion reached by AEI’s researchers ignored the well documented history of racial bias in housing.
“No matter how nuanced and compelling the research is, no one can publish anything about racial bias in housing markets, without our friends Peter and Pinto insisting there is no racial bias in housing markets,” Rothwell said. “Everyone agrees that there used to be racial bias in housing markets. I don’t know when it expired.”
Mark A. Willis, a senior policy fellow at New York University’s Furman Center for Real Estate and Urban Policy, said the source of the two sets of findings might have contributed to the response each has seen. While both organizations are non-partisan, AEI, which leans more conservative, is seen as having a defined agenda, while the centrist Brookings enjoys a more neutral reputation.
Still, Willis — who is familiar with both studies but has not tested their findings — said while the Brookings report notes legitimate disparities between communities, the AEI findings demonstrate that such differences cannot solely be attributed to racial discrimination.
“The real issue here is there are differences across neighborhoods in the value of buildings that visibly look alike, maybe even technically the neighborhood characteristics look alike, but aren’t valued the same way in the market,” Willis said. “Whatever that variable is, Brookings hasn’t necessarily found that there’s bias in addition to all of the other real differences between neighborhoods.”
Setting the course or getting off track?
The two sets of findings have become endemic to the competing views of home appraisers that have emerged in recent years. On one side, those in favor of reforming the home buying process — including fair housing and racial justice advocates, along with emerging disruptors from the tech world — point to the Brookings report as a seminal moment in the current push to root out discriminatory practices on a broad scale.
“It’s been really helpful in driving the conversation forward, to help us better define what is bias and be specific about how we communicate about it, because there’s a number of different types of bias potentially in the housing process,” Kenon Chen, executive vice president of strategy and growth for the tech-focused appraisal management company Clear Capital, said. “That report really … did a good job of highlighting systemic concerns and how, as an industry, we can start to take a look at some of the things that are historical.”
Appraisers, meanwhile, say the Brookings findings made them a scapegoat for issues that extend beyond their remit and set them on course for enhanced regulatory scrutiny.
“What’s causing the racial wealth gap is not 80,000 rogue appraisers who are a bunch of racists and are going out and undervaluing homes based on the race of the homeowner or the buyer, but rather it’s a deeply rooted socioeconomic issue and it has everything to do with buying power and and socioeconomic status,” Jeremy Bagott, a California-based appraiser, said. “It’s not a problem that appraisers are responsible for; we’re just providing the message about the reality in the market.”
Responses to the Brookings study and other related findings include supervisory guidelines around the handling of algorithmic appraisal tools, efforts to reduce barriers to entry into the appraisal profession and greater data transparency around home valuation across census tracts.
But appraisers say other initiatives — including what some see as a lowering of the threshold for challenging an appraisal — will make it harder for them to perform their key duty of ensuring banks do not overextend themselves based on inflated asset prices.
Even those who favor reform within the profession have taken issue with the Brookings’ findings. Jonathan Miller, a New York-based appraiser who has deep concerns about the lack of diversity with the field — which is more than 90% white, mostly male and aging rapidly — said using the study as a basis for policy change put the government on the wrong track.
“There’s something wrong in the appraisal profession, and it’s that minorities are not even close to being fairly represented, but the Brookings study doesn’t connect to the appraisal industry at all,” Miller said. “Yet, that is the linchpin that began this movement. … I’m in favor of more diversity, but the Brookings’ findings are extremely misleading.”
Willis, who previously led JPMorgan Chase’s community development program, said appraisers are justified in their concerns over new policies, noting this is not the first time the profession has shouldered a heavy blame for systemic failures. The government rolled out new reforms for appraisers following both the savings and loan crisis of the 1980s and the subprime lending crisis of 2007 and 2008.
But, ultimately, Willis added, appraisers have left themselves open to such attacks by allowing bad — either malicious or incompetent — actors to enter their field and failing to diversify their ranks.
“It seems clear that the burden is on the industry to ensure that everybody is up to the same quality level,” he said. “Unless the industry polices itself better and is more diverse, it is going to remain very vulnerable to criticism.”
A full decade after U.S. housing markets were crushed by the so-called Great Recession, which led to a major crisis that saw thousands of homes foreclosed upon, things have improved drastically since then. Home values have risen to record highs in many markets, well above pre-recession levels, and foreclosures have fallen to historic lows.
Lawrence Yun, chief economist of the National Association of Realtors, said that lending and regulatory reforms have also helped to prevent a new housing bubble from forming, in spite of concerns from other experts.
“Over the past 10 years, prudent policy reforms and consumer protections have strengthened lending standards and eliminated loose credit, as evidenced by the higher-than-normal credit scores of those who are able to obtain a mortgage and near record-low defaults and foreclosures, which contributed to the last recession,” Yun said. “Today, even as mortgage rates begin to increase and home sales decline in some markets, the most significant challenges facing the housing market stem from insufficient inventory and accompanying unsustainable home price increases.”
But even though inventory continues to be a problem, Yun says that overheating markets are likely to slow down soon. He said that many of the fastest growing markets are seeing prices rise due to insufficient supply rather than strong buyer demand. He added that markets such as Denver and Seattle are already showing signs of slowing down, but said that any fall in home sales is probably going to be connected to supply shortages and price increases.
“The answer is to encourage builders to increase supply, and there is a good probability for solid home sales growth once the supply issue is addressed,” Yun insisted. “Additional inventory will also help contain rapid home price growth and open up the market to prospective home buyers who are consequently—and increasingly—being priced out. In the end, slower price growth is healthier price growth.”
According to Yun, new construction grew by 7.2 percent year-over-year in July, but that’s still not enough to address the inventory shortages. One problem is that builders are struggling with costs, he said.
““Rising material costs and labor shortages do not help builders to be excited about business,” Yun said. “But the lumber tariff is a pure, unforced policy error that raises costs and limits job creation and more home building.”
Yun also thinks existing home sales will fall by around 1 percent to 5.46 million this year. However, he says home value appreciation should remain strong in most markets, rising by about 5 percent on average. Overall home sales should also grow in 2019 due to an increase in supply and moderate price growth, Yun said. he forecasts that existing home sales will rise by 2 percent in 2019, and home prices will rise by 3.5 percent.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
When it comes to your money, safety first. Understand what bank accounts are FDIC-insured to ensure your deposits are protected.*
August 16, 2023
Bank failures aren’t common—but they can happen, typically when a bank is no longer able to cover its liabilities. If depositors get nervous about the viability of their bank, they might withdraw money en masse, known as a bank run. Bank runs can accelerate a bank’s failure, and ultimately the Federal Deposit Insurance Corporation (FDIC) will take control of the bank.
But depositors can rest easy if their bank is FDIC-insured. FDIC insurance is a program managed by an independent agency of the United States government designed to protect customers in the event of bank failure. The standard FDIC insurance amount is $250,000 per depositor, per insured bank, per account ownership category. That maximum amount of $250,000 applies for each bank you have a qualified account with, as long as the bank is an FDIC member. (Discover Bank is an FDIC member.)
So, what bank accounts are FDIC-insured? If you’re opening a bank account, it’s important to understand what FDIC insurance is and what it covers.
What is the history of FDIC insurance?
The Banking Act of 1933 was passed in response to the bank failures of the Great Depression. In addition to other reforms, the act created the Federal Deposit Insurance Corporation. In 1935, the government made the FDIC permanent and tightened its standards.
Banks must be able to prove that they meet certain eligibility requirements to qualify for FDIC insurance, which is funded by payments from covered banks. In the rare event of a bank failure, those funds are used to reimburse the insured accounts of customers at that bank, with certain limits and restrictions.
What are FDIC insurance limits?
Today, FDIC deposit insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category. Coverage wasn’t always that high, however.
When the FDIC was established, accounts were only insured up to $2,500. Over the course of the century, the covered amount was gradually raised in an attempt to keep pace with inflation. According to the FDIC, the most recent coverage increase occurred in response to the 2008 financial crisis, when the covered amount went from $100,000 to the current $250,000.
How do account ownership categories affect FDIC insurance limits?
You can increase your FDIC coverage by opening multiple account ownership categories at the same bank. For example, if you open a business account and a personal checking account at the same bank, each would be covered up to the maximum per law.
A joint bank account, meanwhile, will also be insured separately from a single-ownership account and for each owner of the account. That means if you open an individual checking account and a joint checking with your partner, those two accounts would qualify for $750,000 of total insurance.
Note, however, that this applies to different ownership categories but not to all different types of accounts. That means an individual savings account and an individual checking account belonging to the same owner at the same bank will qualify for a total of $250,000 in FDIC insurance.
Are checking accounts FDIC-insured?
Checking accounts at FDIC-insured institutions are among the deposit products covered by FDIC deposit insurance, according to the FDIC. For your checking account to be eligible, there’s nothing you need to do. The funds you deposit into a checking account at an FDIC-insured bank are automatically protected up to the maximum per law.
Is an online savings account FDIC-insured?
All savings accounts offered by FDIC-insured institutions, including online savings accounts, are covered up to the maximum per law. For all FDIC-covered accounts, both the original deposit amount and the accrued interest within the limit will be protected.
When opening an online account, it’s especially important to double-check that the type of account you’re opening is FDIC-insured. For example, according to the FDIC, crypto savings accounts are not protected by FDIC insurance, even if offered by an institution that is otherwise FDIC-eligible.
Legitimate financial institutions should make clear which accounts are FDIC-insured on their websites. To be certain, always contact the financial institution directly.
Are high-yield savings accounts FDIC-insured?
High-yield savings accounts at FDIC-insured institutions are protected up to the maximum per law, according to the FDIC. If the interest on a savings account causes it to grow beyond $250,000, only the funds up to the limit will be guaranteed protection.
As with checking accounts, if you want to protect more than $250,000 in savings, you’ll need to open accounts under different ownership categories or have accounts at multiple banks.
Is a money market account FDIC-insured?
According to the FDIC, funds deposited into money market accounts offered by FDIC-insured institutions are protected up to the maximum per law, just like FDIC-insured savings accounts.
Money market mutual funds, however, are not protected by the FDIC. Why not? Money market accounts are a type of savings account, while money market mutual funds are a type of investment account. Investments are generally not eligible for FDIC protection.
Is a certificate of deposit (CD) FDIC-insured?
Certificates of deposit at insured institutions are covered by the FDIC up to the maximum per law.
A CD can offer better rates than a high-yield savings account, but CDs work a little differently than savings accounts. With a CD, your money is earning interest at a fixed, guaranteed rate, but if you withdraw the money before the end of its term, you may pay a penalty.
Are Individual Retirement Accounts (IRAs) FDIC-insured?
IRAs, or Individual Retirement Accounts, are also covered up to the maximum per law at FDIC-insured institutions.
For an account to be covered, it generally needs to be “self-directed,” meaning the account holder chooses how their contributions are applied. This could include 401(k)s offered through a job or IRA saving accounts that you choose to open on your own.
IRAs can also include CDs and money market accounts. Retirement CDs, money market accounts, and similar financial products are eligible for coverage.
While stock and bond investments are a common feature of many retirement plans, they are not eligible for FDIC coverage. That means it’s possible that only a portion of your 401(k) or IRA will be covered.
If you’re uncertain if a retirement account or asset is covered, check with the institution providing it.
Can you increase your coverage by adding beneficiaries?
It’s possible to increase your coverage by creating a revocable trust account with multiple beneficiaries.
Trusts are accounts that pay out to a designated beneficiary or beneficiaries after the account holder passes. FDIC coverage applies to each beneficiary for up to five beneficiaries. In other words, a trust account with one owner and five beneficiaries could be covered up to $1,250,000.
If the trust is jointly held between two owners, the FDIC will provide up to $250,000 in coverage per beneficiary per account holder. That means if you want to maximize your coverage to the absolute limit, it would be possible to create a jointly held trust with five beneficiaries insured up to $2,500,000 in total.
It’s important to note that this information is all according to FDIC rules taking effect on April 1, 2024. Under current rules, irrevocable trusts, which cannot be altered after they’re created, can only be insured up to $250,000 regardless of the number of beneficiaries. The new rules treat both types of trusts identically and add the five beneficiary cap for calculating coverage.
Because we’re talking about potentially millions of dollars, it’s all the more essential to consult a financial planning professional about your personal situation.
Will the FDIC insurance limits ever change?
While FDIC insurance limits have been set at $250,000 since 2008, it’s always possible that the insurance limit could be increased in 2023 or down the road, according to Bankrate.
Whether or not that happens in the near future will likely depend on how the current economic and political situation unfolds. If the past decades are any indication, Congress will probably need to raise the limit eventually to account for inflation and other factors. But it’s unclear when that might happen, and savers shouldn’t assume it will be any time soon.
You can contact the FDIC if you have any questions or use their coverage calculator to determine how much of your funds are insured.
What else can you do to protect your money?
Opening an account with an FDIC-insured institution is a wise decision. But bank failures are just one risk to manage. You might also worry about scammers and fraudsters who want access to your hard-earned cash. Learn how to protect your bank account from fraud in 6 steps.
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
* The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. Please consult your financial advisor with respect to information contained in this article and how it relates to you.
The median price of a home in Los Angeles will soon cross a startling threshold: $1 million. The median price of a home in California, meanwhile, is approaching $750,000, according to Zillow. That is more than double the national median and more than triple the figure in Ohio.
This is the definition of housing unaffordability.
Homeownership is becoming farther and farther out of reach for more and more Californians. As of 2019, only 55% of Californians, and just 36% of Black Calfornians, owned a home. The American Dream is increasingly living up to its name — by being no more than a dream — in California.
This isn’t just about homeownership. Renters face proportionate price increases. For the first time, the median monthly rent in the United States rose above $2,000 in the last year, and it’s closing in on $3,000 in California. Many people can’t afford to buy or rent a home here.
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The cost of housing is high for many reasons, including the cost of labor and materials and myriad environmental regulations and mandates, many of them important. But chief among the reasons are supply restrictions. As with any other commodity, if you restrict the supply of housing, you can charge more for it.
This is essentially what zoning and other restrictive land-use regulations do. So it’s no wonder that a wealth of empirical evidence has shown that restrictive zoning makes housing more expensive.
The Los Angeles region has been a prolific producer of such restrictions. A study I led last year found that 78% of residential land in the Greater Los Angeles region and 74% in the city of Los Angeles itself was zoned exclusively for single-family homes, prohibiting apartment buildings and other multifamily developments.
We also found that home prices were correlated with the degree of stringent and exclusionary zoning in every community in the region. So were racial diversity and segregation.
UC Berkeley’s Terner Center modeled six different housing policies for Los Angeles and found that the single intervention with the biggest impact on supply growth was loosening density restrictions.
Yes, California has eased single-family zoning, the ultimate density restriction, by allowing more “accessory dwelling units” — backyard cottages, in-law units and the like — and through “plex” reforms, which allow homeowners to subdivide and redevelop parcels for duplexes and four-plexes. But these measures are too modest to bend this wicked cost curve.
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What we need is deeper density, more multifamily housing and “missing middle” developments that provide a variety of designs suitable to different incomes. We need localities to allow it, and we need the state to mandate it.
What’s at stake is nothing less than the old notion that people born on the lower rungs of the income and wealth ladder can climb higher, the only limit being their ambition and effort. Since World War II, a prominent pillar of this widespread belief has been homeownership. New-Deal-era laws, financial institutions and the GI Bill created the 30-year mortgage, and suburban developers sold homeownership to tens of millions of (mostly white) Americans.
It worked. In 1940, just 44% of Americans owned their own home. By 1950, that figure had reached 55%, and it steadily climbed in every subsequent decade until the subprime mortgage crisis of 2007. By 2000, 67% of Americans owned their own home.
These figures, however, mask enormous disparities. In 2020, white homeownership reached a postwar peak of 75%, while Black homeownership lagged far behind at 44%, only slightly higher than it was in 1970, the year the Fair Housing Act took effect.
Huge generational disparities also persist. Older Americans are far more likely to own their homes; younger generations are struggling to catch up.
One major obstacle to closing these gaps is that the cost of homeownership has soared relative to incomes. According to data from the Federal Housing Finance Agency, the price of housing in the United States rose an average of 4.6% per year from 1975 through 2022, outpacing economic growth and wages. The rate in California was an astonishing 6.7% a year, higher than in any other state.
While it’s true that housing appreciation hasn’t matched the stock market — the S&P 500 rose almost 12% annually on average during the same period — this also underscores the problem. Housing and shelter are a human necessity; stocks are not. And yet housing in the United States and particularly California has become an investment vehicle available to far fewer of us.
For many Americans fortunate enough to own a home, it’s their largest investment — a nest egg for retirement or an asset to borrow against to raise cash for an emergency or a child’s college education. Many homeowners therefore place a premium on maximizing not just the present value of their asset but also its future appreciation.
This is why homeowners not only upgrade kitchens, cabinets and bathrooms, but also fight against multifamily housing, affordable housing and homeless shelters in their neighborhoods and communities in an effort to protect their investments. These “homevoters” will fight to the hilt to prevent any loosening of zoning restrictions.
Overcoming this impulse and undoing restrictive zoning won’t make housing affordable or revive the American Dream on its own. If we don’t, however, the dream will become an impossibility for most of us.
Stephen Menendian is the assistant director and director of research at UC Berkeley’s Othering and Belonging Institute.
Americans take today’s selection of mortgages for granted, but financing a home is a much different experience than it was a century ago
By
Matthew Wells
The furniture industry was booming in Greensboro, N.C., 100 years ago. A furniture craftsman making a solid, steady income might have wanted to buy a home and build up some equity. But the homebuying process then looked very little like it does today. To finance that purchase, the furniture maker first would need to scrape together as much as 40 percent for a down payment, even with good credit. He might then head to a local building and loan association (B&L), where he would hope to get a loan that he would be able to pay off in no more than a dozen years.
Today’s mortgage market, by contrast, would offer that furniture maker a wide range of more attractive options. Instead of going to the local B&L, the furniture maker could walk into a bank or connect with a mortgage broker who could be in town or on the other side of the country. No longer would such a large down payment be necessary; 20 percent would suffice, and it could be less with mortgage insurance — even zero dollars down if the furniture maker were also a veteran. Further, the repayment period would be set at either 15 or 30 years, and, depending on what worked best for the furniture maker, the interest rate could be fixed or fluctuate through the duration of the loan.
The modern mortgage in all its variations is the product of a complicated history. Local, state, national, and even international actors all competing for profits have existed alongside an increasingly active federal government that for almost a century has sought to make the benefits of homeownership accessible to more Americans, even through economic collapse and crises. Both despite and because of this history, over 65 percent of Americans — most of whom carry or carried a mortgage previously — now own the home where they live.
The Early Era of Private Financing
Prior to 1930, the government was not involved in the mortgage market, leaving only a few private options for aspiring homeowners looking for financing. While loans between individuals for homes were common, building and loan associations would become the dominant institutional mortgage financiers during this period.
B&Ls commonly used what was known as a “share accumulation” contract. Under this complicated mortgage structure, if a borrower needed a loan for $1,000, he would subscribe to the association for five shares at $200 maturity value each, and he would accumulate those shares by paying weekly or monthly installments into an account held at the association. These payments would pay for the shares along with the interest on the loan, and the B&L would also pay out dividends kept in the share account. The dividends determined the duration of the loan, but in good economic times, a borrower would expect it to take about 12 years to accumulate enough money through the dividends and deposits to repay the entire $1,000 loan all at once; he would then own the property outright.
An import from a rapidly industrializing Great Britain in the 1830s, B&Ls had been operating mainly in the Northeast and Midwest until the 1880s, when, coupled with a lack of competition and rapid urbanization around the country, their presence increased significantly. In 1893, for example, 5,600 B&Ls were in operation in every state and in more than 1,000 counties and 2,000 cities. Some 1.4 million Americans were members of B&Ls and about one in eight nonfarm owner-occupied homes was financed through them. These numbers would peak in 1927, with 11.3 million members (out of a total population of 119 million) belonging to 12,804 associations that held a total of $7.2 billion in assets.
Despite their popularity, B&Ls had a notable drawback: Their borrowers were exposed to significant credit risk. If a B&L’s loan portfolio suffered, dividend accrual could slow, extending the amount of time it would take for members to pay off their loans. In extreme cases, retained dividends could be taken away or the value of outstanding shares could be written down, taking borrowers further away from final repayment.
“Imagine you are in year 11 of what should be a 12-year repayment period and you’ve borrowed $2,000 and you’ve got $1,800 of it in your account,” says Kenneth Snowden, an economist at the University of North Carolina, Greensboro, “but then the B&L goes belly up. That would be a disaster.”
The industry downplayed the issue. While acknowledging that “It is possible in the event of failure under the regular [share accumulation] plan that … the borrower would still be liable for the total amount of his loan,” the authors of a 1925 industry publication still maintained, “It makes very little practical difference because of the small likelihood of failure.”
Aside from the B&Ls, there were few other institutional lending options for individuals looking for mortgage financing. The National Bank Act of 1864 barred commercial banks from writing mortgages, but life insurance companies and mutual savings banks were active lenders. They were, however, heavily regulated and often barred from lending across state lines or beyond certain distances from their location.
But the money to finance the building boom of the second half of the 19th century had to come from somewhere. Unconstrained by geographic boundaries or the law, mortgage companies and trusts sprouted up in the 1870s, filling this need through another innovation from Europe: the mortgage-backed security (MBS). One of the first such firms, the United States Mortgage Company, was founded in 1871. Boasting a New York board of directors that included the likes of J. Pierpont Morgan, the company wrote its own mortgages, and then issued bonds or securities that equaled the value of all the mortgages it held. It made money by charging interest on loans at a greater rate than what it paid out on its bonds. The company was vast: It established local lending boards throughout the country to handle loan origination, pricing, and credit quality, but it also had a European-based board comprised of counts and barons to manage the sale of those bonds on the continent.
Image : Library of Congress, Prints & Photographs Division, FSA/OWI collection [LC-DIG-FSA-8A02884]
A couple moves into a new home in Aberdeen Gardens in Newport News, Va., in 1937. Aberdeen Gardens was built as part of a New Deal housing program during the Great Depression.
New Competition From Depression-Era Reforms
When the Great Depression hit, the mortgage system ground to a halt, as the collapse of home prices and massive unemployment led to widespread foreclosures. This, in turn, led to a decline in homeownership and exposed the weaknesses in the existing mortgage finance system. In response, the Roosevelt administration pursued several strategies to restore the home mortgage market and encourage lending and borrowing. These efforts created a system of uneasy coexistence between a reformed private mortgage market and a new player — the federal government.
The Home Owners’ Loan Corporation (HOLC) was created in 1933 to assist people who could no longer afford to make payments on their homes from foreclosure. To do so, the HOLC took the drastic step of issuing bonds and then using the funds to purchase mortgages of homes, and then refinancing those loans. It could only purchase mortgages on homes under $20,000 in value, but between 1933 and 1936, the HOLC would write and hold approximately 1 million loans, representing around 10 percent of all nonfarm owner-occupied homes in the country. Around 200,000 borrowers would still ultimately end up in foreclosure, but over 800,000 people were able to successfully stay in their homes and repay their HOLC loans. (The HOLC is also widely associated with the practice of redlining, although scholars debate its lasting influence on lending.) At the same time, the HOLC standardized the 15-year fully amortized loan still in use today. In contrast to the complicated share accumulation loans used by the B&Ls, these loans were repaid on a fixed schedule in which monthly payments spread across a set time period went directly toward reducing the principal on the loan as well as the interest.
While the HOLC was responsible for keeping people in their homes, the Federal Housing Administration (FHA) was created as part of the National Housing Act of 1934 to give lenders, who had become risk averse since the Depression hit, the confidence to lend again. It did so through several innovations which, while intended to “prime the pump” in the short term, resulted in lasting reforms to the mortgage market. In particular, all FHA-backed mortgages were long term (that is, 20 to 30 years) fully amortized loans and required as little as a 10 percent down payment. Relative to the loans with short repayment periods, these terms were undoubtedly attractive to would-be borrowers, leading the other private institutional lenders to adopt similar mortgage structures to remain competitive.
During the 1930s, the building and loan associations began to evolve into savings and loan associations (S&L) and were granted federal charters. As a result, these associations had to adhere to certain regulatory requirements, including a mandate to make only fully amortized loans and caps on the amount of interest they could pay on deposits. They were also required to participate in the Federal Savings and Loan Insurance Corporation (FSLIC), which, in theory, meant that their members’ deposits were guaranteed and would no longer be subject to the risk that characterized the pre-Depression era.
The B&Ls and S&Ls vehemently opposed the creation of the FHA, as it both opened competition in the market and created a new bureaucracy that they argued was unnecessary. Their first concern was competition. If the FHA provided insurance to all institutional lenders, the associations believed they would no longer dominate the long-term mortgage loan market, as they had for almost a century. Despite intense lobbying in opposition to the creation of the FHA, the S&Ls lost that battle, and commercial banks, which had been able to make mortgage loans since 1913, ended up making by far the biggest share of FHA-insured loans, accounting for 70 percent of all FHA loans in 1935. The associations also were loath to follow all the regulations and bureaucracy that were required for the FHA to guarantee loans.
“The associations had been underwriting loans successfully for 60 years. FHA created a whole new bureaucracy of how to underwrite loans because they had a manual that was 500 pages long,” notes Snowden. “They don’t want all that red tape. They don’t want someone telling them how many inches apart their studs have to be. They had their own appraisers and underwriting program. So there really were competing networks.”
As a result of these two sources of opposition, only 789 out of almost 7,000 associations were using FHA insurance in 1940.
In 1938, the housing market was still lagging in its recovery relative to other sectors of the economy. To further open the flow of capital to homebuyers, the government chartered the Federal National Mortgage Association, or Fannie Mae. Known as a government sponsored-enterprise, or GSE, Fannie Mae purchased FHA-guaranteed loans from mortgage lenders and kept them in its own portfolio. (Much later, starting in the 1980s, it would sell them as MBS on the secondary market.)
The Postwar Homeownership Boom
In 1940, about 44 percent of Americans owned their home. Two decades later, that number had risen to 62 percent. Daniel Fetter, an economist at Stanford University, argued in a 2014 paper that this increase was driven by rising real incomes, favorable tax treatment of owner-occupied housing, and perhaps most importantly, the widespread adoption of the long-term, fully amortized, low-down-payment mortgage. In fact, he estimated that changes in home financing might explain about 40 percent of the overall increase in homeownership during this period.
One of the primary pathways for the expansion of homeownership during the postwar period was the veterans’ home loan program created under the 1944 Servicemen’s Readjustment Act. While the Veterans Administration (VA) did not make loans, if a veteran defaulted, it would pay up to 50 percent of the loan or up to $2,000. At a time when the average home price was about $8,600, the repayment window was 20 years. Also, interest rates for VA loans could not exceed 4 percent and often did not require a down payment. These loans were widely used: Between 1949 and 1953, they averaged 24 percent of the market and according to Fetter, accounted for roughly 7.4 percent of the overall increase in homeownership between 1940 and 1960. (See chart below.)
Demand for housing continued as baby boomers grew into adults in the 1970s and pursued homeownership just as their parents did. Congress realized, however, that the secondary market where MBS were traded lacked sufficient capital to finance the younger generation’s purchases. In response, Congress chartered a second GSE, the Federal Home Loan Mortgage Corporation, also known as Freddie Mac. Up until this point, Fannie had only been authorized to purchase FHA-backed loans, but with the hope of turning Fannie and Freddie into competitors on the secondary mortgage market, Congress privatized Fannie in 1968. In 1970, they were both also allowed to purchase conventional loans (that is, loans not backed by either the FHA or VA).
A Series of Crises
A decade later, the S&L industry that had existed for half a century would collapse. As interest rates rose in the late 1970s and early 1980s, the S&Ls, also known as “thrifts,” found themselves at a disadvantage, as the government-imposed limits on their interest rates meant depositors could find greater returns elsewhere. With inflation also increasing, the S&Ls’ portfolios, which were filled with fixed-rate mortgages, lost significant value as well. As a result, many S&Ls became insolvent.
Normally, this would have meant shutting the weak S&Ls down. But there was a further problem: In 1983, the cost of paying off what these firms owed depositors was estimated at about $25 billion, but FSLIC, the government entity that ensured those deposits, had only $6 billion in reserves. In the face of this shortfall, regulators decided to allow these insolvent thrifts, known as “zombies,” to remain open rather than figure out how to shut them down and repay what they owed. At the same time, legislators and regulators relaxed capital standards, allowing these firms to pay higher rates to attract funds and engage in ever-riskier projects with the hope that they would pay off in higher returns. Ultimately, when these high-risk ventures failed in the late 1980s, the cost to taxpayers, who had to cover these guaranteed deposits, was about $124 billion. But the S&Ls would not be the only actors in the mortgage industry to need a taxpayer bailout.
By the turn of the century, both Fannie and Freddie had converted to shareholder-owned, for-profit corporations, but regulations put in place by the Federal Housing Finance Agency authorized them to purchase from lenders only so-called conforming mortgages, that is, ones that satisfied certain standards with respect to the borrower’s debt-to-income ratio, the amount of the loan, and the size of the down payment. During the 1980s and 1990s, their status as GSEs fueled the perception that the government — the taxpayers — would bail them out if they ever ran into financial trouble.
Developments in the mortgage marketplace soon set the stage for exactly that trouble. The secondary mortgage market in the early 2000s saw increasing growth in private-label securities — meaning they were not issued by one of the GSEs. These securities were backed by mortgages that did not necessarily have to adhere to the same standards as those purchased by the GSEs.
Freddie and Fannie, as profit-seeking corporations, were then under pressure to increase returns for their shareholders, and while they were restricted in the securitizations that they could issue, they were not prevented from adding these riskier private-label MBS to their own investment portfolios.
At the same time, a series of technological innovations lowered the costs to the GSEs, as well as many of the lenders and secondary market participants, of assessing and pricing risk. Beginning back in 1992, Freddie had begun accessing computerized credit scores, but more extensive systems in subsequent years captured additional data on the borrowers and properties and fed that data into statistical models to produce underwriting recommendations. By early 2006, more than 90 percent of lenders were participating in an automated underwriting system, typically either Fannie’s Desktop Underwriter or Freddie’s Loan Prospector (now known as Loan Product Advisor).
Borys Grochulski of the Richmond Fed observes that these systems made a difference, as they allowed lenders to be creative in constructing mortgages for would-be homeowners who would otherwise be unable to qualify. “Many potential mortgage borrowers who didn’t have the right credit quality and were out of the mortgage market now could be brought on by these financial-information processing innovations,” he says.
Indeed, speaking in May 2007, before the full extent of the impending mortgage crisis — and Great Recession — was apparent, then-Fed Chair Ben Bernanke noted that the expansion of what was known as the subprime mortgage market was spurred mostly by these technological innovations. Subprime is just one of several categories of loan quality and risk; lenders used data to separate borrowers into risk categories, with riskier loans charged higher rates.
But Marc Gott, a former director of Fannie’s Loan Servicing Department said in a 2008 New York Times interview, “We didn’t really know what we were buying. This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”
Nonetheless, some investors still wanted to diversify their portfolios with MBS with higher yields. And the government’s implicit backing of the GSEs gave market participants the confidence to continue securitizing, buying, and selling mortgages until the bubble finally popped in 2008. (The incentive for such risk taking in response to the expectation of insurance coverage or a bailout is known as “moral hazard.”)
According to research by the Treasury Department, 8 million homes were foreclosed, 8.8 million workers lost their jobs, and $7.4 trillion in stock market wealth and $19.2 trillion in household wealth was wiped away during the Great Recession that followed the mortgage crisis. As it became clear that the GSEs had purchased loans they knew were risky, they were placed under government conservatorship that is still in place, and they ultimately cost taxpayers $190 billion. In addition, to inject liquidity into the struggling mortgage market, the Fed began purchasing the GSEs’ MBS in late 2008 and would ultimately purchase over $1 trillion in those bonds up through late 2014.
The 2008 housing crisis and the Great Recession have made it harder for some aspiring homeowners to purchase a home, as no-money-down mortgages are no longer available for most borrowers, and banks are also less willing to lend to those with less-than-ideal credit. Also, traditional commercial banks, which also suffered tremendous losses, have stepped back from their involvement in mortgage origination and servicing. Filling the gap has been increased competition among smaller mortgage companies, many of whom, according to Grochulski, sell their mortgages to the GSEs, who still package them and sell them off to the private markets.
While the market seems to be functioning well now under this structure, stresses have been a persistent presence throughout its history. And while these crises have been painful and disruptive, they have fueled innovations that have given a wide range of Americans the chance to enjoy the benefits — and burdens — of homeownership.
READINGS
Brewer, H. Peers. “Eastern Money and Western Mortgages in the 1870s.” Business History Review, Autumn 1976, vol. 50, no. 3, pp. 356-380.
Fetter, Daniel K. “The Twentieth-Century Increase in U.S. Home Ownership: Facts and Hypotheses.” In Eugene N. White, Kenneth Snowden, and Price Fishback (eds.), Housing and Mortgage Markets in Historical Perspective. Chicago: University of Chicago Press, July 2014, pp. 329-350.
McDonald, Oonagh. Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare. New York, N.Y.: Bloomsbury Publishing, 2012.
Price, David A., and John R. Walter. “It’s a Wonderful Loan: A Short History of Building and Loan Associations,” Economic Brief No. 19-01, January 2019.
Romero, Jessie. “The House Is in the Mail.” Econ Focus, Federal Reserve Bank of Richmond, Second/Third Quarter 2019.
Rose, Jonathan D., and Kenneth A. Snowden. “The New Deal and the Origins of the Modern American Real Estate Contract.” Explorations in Economic History, October 2013, vol. 50, no. 4, pp. 548-566.
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Prior to the event, AIME launched its State Captains program, which created over 100 grassroots broker advocates from almost every US state. Through the program, brokers identify and address issues that create barriers to homeownership for consumers in their communities. Many of AIME’s appointed State Captains attended the event to represent their state. One of … [Read more…]
A divisive capital proposal released Thursday could lead banks with $100 billion or more in assets to further distance themselves from the housing finance business.
The proposal specifically adds higher risk weightings for portfolio products with elevated loan-to-value ratios. It also more generally raises capital requirements in a manner expected to deter investment in mortgage servicing rights, which have had a high risk weighting.
“This is a disincentive for banks to make higher LTV loans,” said Pete Mills, senior vice president of policy and member engagement at the Mortgage Bankers Association, of the new proposal.
“I think we need more time to dig into how this might impact warehouse lending and MSRs,” he added. “I would say for MSRs, in the context of a rule that raises capital standards by 15 to 20%, institutions are going to potentially shed assets that have such high risk weights.”
The MBA and others interviewed for this article said they also are continuing to study what the details of the rule might mean for securitized mortgages.
For now, the central concern of mortgage and housing industries in the proposal appears to be the new LTV risk weightings, which officials have specifically called out for comment, noting that it was not their intent to hurt the low- and moderate-income housing markets with them.
However, that’s likely what they’d do, said David Dworkin, president and CEO of the National Housing Conference.
“The rule would significantly discourage banks from lending to people with lower down payments. These are generally first-time homebuyers who don’t have the multigenerational wealth or home equity to afford a 20% or greater downpayment,” he said.
Some wealthier borrowers with high-balance mortgages could be impacted as well.
“Depending on the LTV of those jumbo mortgages, this could impact the bank’s willingness to do high LTV jumbo or change the cost of how they price those loans relative to the rest of the market,” said Jon Van Gorp, chair at law firm Mayer Brown.
There’s some precedent for higher risk weighting for elevated LTVs from a credit perspective. Borrowers with less equity may be less incentivized to continue paying. International capital rules also have LTV distinctions, but those in the U.S. proposal are 20% higher, Van Gorp said.
Currently, lenders generally risk-weight well-underwritten, first-lien mortgages held in portfolio by 50%, although that number can go up to 100% or more for a home loan outside of that box, said Van Gorp.
The proposed U.S. scale of risk weighting goes down as low as 40% for LTVs of 50% or lower. But any mortgage with less than a 20% down payment will end up with a risk weighting of 60% or higher, hurting any affordability buyers in that category.
Dworkin called the approach “not consistent with modern mortgage underwriting or the true risks to the financial institution for making lower down-payment loans,” noting that “modern mortgage underwriting considers a wide range of factors, not just one.”
The proposal further compounds concerns about the ability of low- to moderate-income borrowers to access the mortgage market because it does not appear to provide any breaks for mortgage insurance, a standard offset to low down payments, Dworkin said.
“The rule ignores that basic reality in mortgage finance,” he said.
There also are concerns that the new LTV-based requirements could lead to increased taxpayer risk in government-related programs and nonbank mortgage concentration if it ends up funneling these loans away from banks and into those markets.
If the current capital requirements moved forward, “basically, we would be telling banks, we want to encourage you to allow lesser-regulated independent mortgage banks to control even more market share than they do already,” he said.
The LTV risk weightings also could be an impediment to Community Reinvestment Act lending requirements that banks have, Dworkin added.
All these arguments could be compelling to banking officials, but they’ll likely have counter-considerations like the experience during the Great Recession, when particularly loose underwriting decimated the performance of an excessive number of particularly high LTV loans.
The banking crisis this year also appears to be weighing on the minds of policymakers and accounts for the reduction in the asset threshold for banks to $100 billion from $250 billion, since it involved some players in that size range, as well as some mortgage concerns.
However, arguments can be made in response that reforms in underwriting and the Great Recession have drastically improved loan performance, and the more recent banking crisis was linked more to things like runs on uninsured deposits and asset-liability mismatches than mortgage credit risk, said Andy Duane, attorney at mortgage law firm Polunsky Beitel Green.
“If the industry comments on those LTV requirements that are over and above what was required in the international framework, I think we might have that ability to stop higher prices and higher rates down the road,” he said.
Nearly a century ago, Congress created the Federal Home Loan Bank system (FHLBs) to promote home ownership and provide liquidity to thrifts (savings and loans) and insurance companies that primarily provided mortgages at that time. Today’s financial system is radically different: Thrifts are synonymous with banks; mortgage lending originates from within and beyond the banking system; and securitization has become the driving force for liquidity in the housing finance marketplace. In light of these systemic changes, it is time to reassess the purpose and mission of the FHLBs. Their regulator, the Federal Housing Finance Agency (FHFA), has launched a comprehensive review.
The Brookings Institution’s Center on Regulation and Markets, Boston University’s Review of Banking & Financial Law, and Boston University School of Law co-hosted a forum to discuss and debate how the FHLB system is working, what its mission should be, and what reforms, if any, should be undertaken. We heard from a wide range of experts, including current FHFA Director Sandra Thompson, former FHLB regulators, affordable housing advocates, and leading academics and researchers. Here are four key take aways from the event, which can be watched in full here.
1. Are the Federal Home Loan Banks focused on their mission to promote housing?
The homeownership rates for white households was 75%, compared to 45% for Black households
Supporting housing finance is the original purpose of the FHLB system, but there is no requirement that members use FHLB advances to promote housing. Lisa Rice, president and CEO of the National Fair Housing Alliance, described the mortgage market system’s problematic institutionalized preference toward white Americans, noting that mortgages were not “made universally available to people… [these policies] systematize the association between race and risk in our financial markets that is still with us today.” She called on the FHLBs and the broader housing finance system to prioritize reducing the racial disparity in homeownership. In the second quarter of 2022, the homeownership rates for white households was 75%, compared to 45% for Black households, according to the Department of Treasury. At nearly 30 points, the racial homeownership gap is higher today than it was in 1960. She cited small mortgage loans (under $150,000) and special purpose credit programs as models to be promoted.
Ms. Rice urged “bold,” not “incremental,” change for the FHLBs while Kathryn Judge, Harvey J. Goldschmid Professor of Law and vice dean at Columbia Law School, called this an “exciting moment” for rethinking the role of the FHLBs.
Panelists brought up the case of Silvergate Bank, a bank that primarily supports cryptocurrency actors which borrowed heavily from the FHLB system, particularly in recent times of stress, as an example of how the FHLB system’s focus has strayed far from housing. The conversation highlighted that the FHLBs focus on the type and quality of collateral for their advances rather than the purpose for which the banks use those advances.
Those advances generate profits and the FHLBs have long been required to pay a share of their profits toward affordable housing through the Affordable Housing Program (AHP) they administer. Luis Cortes, founder and CEO of Esperanza and a former member of the FHLBank of Pittsburgh’s board of directors, asserted that FHLB provisions do not go far enough, stating that the current rate of 10% of profits for AHP amount to “getting gamed by the membership,” given the value the FHLBs provide to their members. He stressed that the role of government is not recognized and that a 50/50 partnership is in order. George Collins, former chief risk officer for the FHLBank of Boston, agreed, citing an annual government subsidy of $5-$6 billion for the FHLBs shifting the burden of progress onto member banks. “I really think that it’s in the best interest of the members to jump forward here … because the members get a lot of benefit from the home loan bank system.”
Julieann Thurlow, president & CEO of Reading Cooperative Bank in Massachusetts and chair-elect of the American Bankers Association, raised another key purpose of the FHLB system: to promote community banks and their ability to lend and serve locally. She discussed the value FHLBs provide to community banks, stating: “It is foundational as far as a liquidity source.” The mortgage market structurally has moved toward commoditization whereby mortgages are originated by national lenders (often non-banks), sold into securities, and then serviced by for-profit specialized servicing companies. Thurlow pointed out the value that community banks bring, as individuals can “walk through the front door of a community institution,” not resorting to a 1-800 number. One of the many lessons of ‘08 Financial Crisis and housing market disaster is that just originating a mortgage is insufficient, unless that mortgage is sustainable, which requires adequate resources should the borrower encounter financial difficulty.
2. Are the FHLBs properly regulated?
Congress created the FHFA to better regulate the FHLBs during the midst of the financial crisis in 2008. FHFA replaced the Federal Housing Finance Board, whose former chairman Bruce Morrison, made the point that a government-sponsored entity (GSE) “…should not exist unless they have a clear public purpose, and they perform that purpose … it’s not good enough that they’re safe and sound.”
Professor Judge built upon this point, connecting the recent Silvergate lending episode to questions about whether FHLB regulation even considers what purpose banks are using the GSE subsidy for: “[This] might actually not have been a failure of supervision, which begs a much bigger question about the mission drift … supporting a bank that could corrupt the perception of safety and soundness of banking system generally.” She posed the question of how access to FHLB liquidity may have influenced the risk appetite of Silvergate. This exposes the tension between the FHLB system and the Federal Deposit Insurance Corp (FDIC) as the ultimate guarantor of system advances.
“Total avoidance of bank failure is not necessarily a good thing”
The FHLB system is designed to provide liquidity for its members, but due to the FHLB’s super-lien priority over the FDIC, they can shift any lending losses to the FDIC’s deposit insurance fund when a member bank fails. Brookings’s Aaron Klein argued that total avoidance of bank failure is not necessarily a good thing, as some banks that make bad business model decisions deserve to fail. He cited a paper by fellow panelist Scott Frame, Vice President of theFederal Reserve Bank of Dallas, “The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?” as evidence that the FHLB system acted as a lender-of-first-resort to some of the largest originators of subprime mortgages who eventually failed (or would have failed) during the housing and financial crisis of 2007-2009, IndyMac being the prime example. Frame commented that the regulatory problems remain, saying “The primary regulators don’t have any particular say, certainly about any specific advance or anything. This is a business arrangement between the members and their home loan bank.”
Former FHFA Director Mark Calabria, who helped write the law creating FHFA while a senior staffer for Senator Richard Shelby (R-AL), noted the structural limitations of the current regulatory structure: FHFA regulates the FHLBs, but FHLB members are regulated by federal and state banking regulators and state insurance regulators. This was not always the case. Until the 1980s, as the prior regulator of FHLBs, the FHFA also regulated thrifts who were then the major members of the FHLB system (along with insurance companies). This raises questions of inter-regulatory coordination, particularly between liquidity lenders such as the Federal Reserve and FHLB, supervisors, and the FDIC as receiver of failed banks.
3. What reforms should be made?
Michael Stegman, from the Urban Institute, observed that considering executive compensation at the other GSEs may prove fruitful. “The GSEs have a scorecard where performance is tied to … mission-critical activities … we ought to think about how that kind of incentive … can influence compensation.” Klein agreed with Stegman’s idea on executive compensation. He added three ideas: restricting banks to membership in a single FHLB; a restriction on how much one FHLB can lend to a single member; and greater FHLB participation in supporting lending for projects that fill the gap between five to 49 units and mixed-use development. Dennis Shea, executive director at the J. Ronald Terwilliger Center for Housing Policy, stressed that regulators should do more about housing supply. “This area of five to 49 multi-family [housing], which has been traditionally underfinanced, is a worthwhile idea.” Furthermore, on the issue of transparency, Shea asserted that a government assessment of the value of the taxpayer subsidy provided to the FHLBs and their members and the public benefit they provide would prove helpful.
“Regulators should do more about housing supply”
Megan Haberle, senior director of policy at the National Community Reinvestment Coalition, called for greater regulatory clarity on advances, stating: “Not only tracking the advances, [but] attaching stronger strings to them … we want to make sure the advances are attached to that core purpose.” She also called for expanding usage of Community Reinvestment Act (CRA) performance by the FHLBs as well as performance for first time homebuyer support, nothing that under current law many members of FHLBs such as insurance companies and mortgage businesses are not covered by CRA.
Mr. Stegman advocated that GSEs, should not be able to lobby, citing the $3 million spent in lobbying fees in 2021. He also proposed mandating member banks use the community investment program advances to support affordable housing initiatives. The myth of “zero public subsidy” of the FHLBs needs to be dispelled, he said, citing the six notches that the credit rating agencies ascribe to the implied taxpayer support of FHLB debt.
4. View from the top
In the keynote fireside chat, Boston University’s Cornelius Hurley interviewed Director Sandra Thompson regarding the FHFA’s review of the FHLBanks’ mission, as well as proposed recommendations for the future. Director Thompson agreed that member banks could do more to promote affordable housing. “They’re fulfilling their liquidity prong very well, but with regard to affordable housing and community investment … they could do better.”
Responding to Mr. Hurley’s question asking whether taxpayers are “stakeholders” in the FHLBanks, Director Thompson responded, “Absolutely,” citing the implied taxpayer guarantee of all FHLB debt and their exemption from paying taxes among the reasons. She also said, “The status quo is not acceptable.”
“The status quo is not acceptable.”
Mr. Hurley inquired about board composition and executive compensation, asking if FHFA can ‘pull any levers’ in the area. Director Thompson directed her answer about executive compensation to the forthcoming report and its recommendations, which will include both legislative and regulatory recommendations. Regarding compensation, she mentioned that she did not set executive compensation levels or ranges but that she has the authority to deny. She offered insight about what diversity in board composition looks like. “When we talk about diversity, not only is it just race, gender diversity, but it’s also diversity with some of the board members and their experiences,” citing an example about representation in districts that have significant tribal communities.
Next Steps: FHFA is continuing its listening sessions and roundtables and has invited comments to be submitted by March 17, 2023. The Review of Banking and Financial Law will be publishing further materials dedicated to proposals on FHLB reform. The call for papers can be found here.
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
Care homes operators have warned that a recent surge in mortgage rates and a delay to government reforms will sound a “death knell” for some UK providers.
The number of registered care homes fell to 12,224 on May 31 from 12,280 at the start of the year, according to data shared with the Financial Times by carehome.co.uk, a care home review site.
The rate of closures in England slowed in the first half of 2023, compared with the same period in 2022. However, a rise in mortgage rates threatens to increase the burdens on the care sector, compounding rising food and fuel prices and funding shortfalls.
“We are facing some extremely challenging times,” said Nadra Ahmed, chair of the National Care Association, a professional body. “There are vulnerable providers out there right now and there are a lot [of homes] that will be on the market.”
The challenges encountered by some operators would make their businesses “unviable”, she added, citing Pelham House in Kent as one of the latest to hit financial trouble. “Sadly they had to make the decision after 40 years to shut their doors,” she said.
“If you’ve got mortgages that’s going to have an impact on your ability to repay your borrowings.”
The Bank of England increased interest rates by 0.5 percentage points to 5 per cent in June in an effort to tame inflation, leading to rises in monthly mortgage repayments for borrowers on variable rates.
While interest rates are not expected to climb by as much as previously estimated following better than expected June inflation data last week, care providers are already feeling the heat.
Jay Dodhia, chief executive and co-founder of Serene Care, established with his wife Palvi, renovates and runs failing care homes. He said its model had been resilient but cautioned that rising interest rates could be particularly challenging for new builds.
“Most care homes are [on] variable rates — even when rates were very low it was very hard to get fixed rates on care home mortgages,” he said. “As the variable rate or the underlying BoE rate crept up, so have our interest payments.”
“Everything in isolation will affect you, if you put it all together — the rising inflation, utilities, food costs, staffing challenges . . . it could be a death knell for several [providers],” said Dodhia.
The number of councils in England reporting care home closures in their area rose to about 44 per cent at the end of May 2023, according to the Association of Directors of Adult Social Services, a charity.
Natasha Curry, deputy director of policy at the Nuffield Trust, said in 2019, before the coronavirus pandemic, the level was about a third.
“With borrowing rates also rocketing, it’s not a surprise that we’re seeing more closures of care homes and I think it’s inevitable that trend will continue,” said Curry.
During the Covid crisis, an injection of emergency government funding had helped to stabilise the market, cushioning the impact of falling occupancy rates. But that funding had ended.
Cathie Williams, joint chief executive of the Association of Directors of Adult Social Services, said councils had a duty to provide “continuity of care” for residents if a home closed.
But a decade of austerity, Brexit, the pandemic and staff shortages compounded by surging living costs had contributed to “a considerable lack of resilience” in the sector.
Where care places existed, “it tends to be because they’re in the wrong place or the wrong kind of care home or the quality is not good enough”, she added.
Health leaders warned of the effect of diminishing capacity in social care on the wider health system. Matthew Taylor, chief executive of the NHS Confederation which represents health organisations across the UK, said health leaders knew “all too well the impact that a lack of social and residential care has on the NHS”.
The support provided to residents in care homes could prevent avoidable hospital admissions. Moreover, a lack of available care home places for patients who could otherwise have been discharged from hospital could create “a log jam effect in A&Es with long ambulance waits”, Taylor added.
“The good news is we can see the rate of closures slowing in England and Wales although unfortunately Scotland has seen a rise,” said Richard Stebles, head of business intelligence at carehome.co.uk.
“In order to stay sustainable, we are likely to see care providers trying to attract more privately funded residents who pay higher fees than those funded by the local authority.”
Dodhia said the average fee for publicly funded social care bed should be £900 per week. But local authorities are often paying about £600 to £700 a week; some are willing to spend just £490 a week.
Care home operators had hoped for more funding from local authorities following a “cost of care exercise” that sought to generate a shared understanding of the cost of adult social care. But some councils struggled to increase payment and reforms were pushed back to October 2025.
Providers have also fought to access the £200mn earmarked for the NHS crisis plan, which aimed to move patients from hospitals to care homes.
A “winter discharge fund” had been announced, said Dodhia, but “local authorities didn’t really want to spend it”. He added: “They knew that as soon as that funding ran out then the residents would be left vulnerable, because they can’t continue to fund [the scheme].
“We heard about all these great support plans but we didn’t see any of it,” he said.
The Department of Health and Social Care said it was investing up to £7.5bn in social care over the next two years — “the biggest funding increase in history” — to boost capacity in social care, including £1.4bn that local authorities could use flexibly, including to pay social care providers more.
It added: “Despite the pressures the adult social care market faces, the number of adult social care locations registered with the Care Quality Commission has remained stable, and there are 6,600 more home care agencies in England now compared to 2010.”
Pay option arms, which allow homeowners to make less than the interest-only mortgage payment each month (negative amortization), may be partially banned in the state of California if proposed mortgage reform legislation becomes law.
Yesterday, Assemblymember Ted Lieu announced that the California Assembly passed “Assembly Bill 260,” which bans the worst of so-called “predatory lending practices.”
“More specifically, AB 260 would create a strong fiduciary duty standard for mortgage brokers across all loan products,” Lieu’s office said in a release.
“It eliminates compensation incentives that led to riskier loans, directly prohibits steering, and directly prohibits brokers and lenders from making false or deceptive statements connected with a subprime loan.”
It also establishes clear regulations for prepayment penalties and bans negative amortization on “higher-priced mortgage loans,” while imposing stiff penalties to prevent abusive subprime lending.
Essentially, brokers would not be able to receive compensation (yield spread premium) for tacking on prepay penalties to higher-priced loans (which I’ve yet to find a clear definition for), effectively rendering them useless.
A similar bill was vetoed last year by Governor Schwarzenegger, but the ongoing mortgage crisis has forced him to call a Special Session of the Legislature.
“We must enact landmark reforms to address the systemic failures in California’s subprime mortgage industry,” said Assemblymember Lieu.
“These failures have not only devastated California’s economy, they have contributed to a national and international financial meltdown.”
The bill’s provisions would apply to the higher-priced mortgage loans originated on or after July 1, 2010.