Morning Report – Why the Community Reinvestment Act is based on flawed logic 1/17/14

Posted on January 17, 2014 by Brent Nyitray

Vital Statistics:

Last Change Percent
S&P Futures 1837.7 1.5 0.08%
Eurostoxx Index 3147.5 -2.7 -0.08%
Oil (WTI) 94.69 0.7 0.78%
LIBOR 0.237 0.000 0.11%
US Dollar Index (DXY) 81.05 0.135 0.17%
10 Year Govt Bond Yield 2.83% -0.01%
Current Coupon Ginnie Mae TBA 105.2 0.2
Current Coupon Fannie Mae TBA 104 0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.42
Markets are flattish this morning after UPS missed and housing starts came in a bit better than expected. Bonds and MBS are up.
Housing starts came in at 999,000 and building permits came in at 986,000. Single Fam and Multi-fam both fell, although single fam is up year-over-year and multi fam is down. Starts are up small from a year ago, and down from the huge 1.1 million print we saw in November. While a million starts is a champagne-popping number in the context of the Great Recession, it is still a lousy number historically. Pre-bubble, starts averaged about 1.5 million a year, and routinely topped 2 million a year early in recoveries. We have spent years below the nadir or prior recessions which usually exhibited sharp V-type crashes and recoveries. Once household formation numbers recover (and we have tremendous pent-up demand here), we will find ourselves with a shortage of homes.
Household formation vs Housing Starts

Industrial Production came in as expected at .3%, and capacity utilization ticked up to 79.2%. The average since the 1960s has been 80.6%, so we are approaching normalcy here after bottoming at 66.9% in 2009. The prior low was 70.9% during the nasty 81-82 recession. Yet another data point showing just how rough the past 5 years have been.

Freddie Mac has an interesting chart showing how depressed the mortgage business has been, but also why forecasts might be a little too gloomy. They look at home sales relative to housing stock (basically housing turnover) and then compare it to purchase applications. Two things jump out at me: first, turnover (the blue line) is very low at the moment, which probably reflects the underwater borrower phenomenon. People can’t move if they can’t sell. But second, note that as housing turnover increased recently, purchase applications (the green line) remained more or less flat – that is evidence of the cash / professional buyer who has been dominating the marketplace. Both are temporary headwinds for mortgage bankers that will abate as home prices continue to rise. Underwater homeowners will eventually get right-side up and will be able to sell. Professional investors will begin to balk at the higher prices and may even begin to sell. The purchase business will benefit from a number of major big trends going forward: (a) a “payback” of the low household formation numbers over the last few years, (b) increasing turnover as underwater home owners finally get right side up, and (c) the professional investor’s exit from the distressed home market (the green line will catch up to the blue line)

Zillow has a study showing that targeted lending areas had the biggest drops in real estate prices. This is unsurprising given that the chance of a home becoming worthless is higher in places like Detroit or Harrisburg than it is in, say Stamford CT or San Diego CA. Unwittingly the study also proves a point that I have been making for quite some time – that the underlying logic to the Community Reinvestment Act is flawed. Essentially, the CRA says that borrowers with the same characteristics (FICO / LTV) should get the same rate. And if they don’t get the same rate, then that is prima facie evidence of discrimination. That logic is perfectly valid for some forms of credit – particularly credit cards, installment debt, etc. However, mortgages are different. They are secured loans, and when a lender looks at a secured loan, they take into account not only the probability of getting paid (via credit scores), but also the characteristics of the underlying collateral. The CRA proponents assume a house is a house is a house and FICO is all that matters. But the study shows that isn’t the case – the lender has to take into account what happens if they are not paid. And because the underlying homes in targeted lending areas are more likely to have huge price swings (particularly to the downside), when lenders charge more for loans in these areas, they are not guilty of discrimination – they are simply properly pricing risk. Therefore, the CRA isn’t correcting some purported wrong, it is simply an excuse for wealth redistribution.

Filed under: Morning Report |

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19 Responses

  3. Brent Nyitray, on January 17, 2014 at 10:26 am said:

    The Republican Party is doomed!. Doomed, I say!

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  7. Whitaker. Motherfucking. Chambers, on January 17, 2014 at 1:46 pm said:

    Ok, *which* Koch brother got to the Beebs!

    http://m.bbc.co.uk/news/science-environment-25771510

    Bernie must be shitting himself. What’s next, NPR comes out for vouchers?

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  8. Michigoose, on January 20, 2014 at 9:14 am said:

    The Republican Party is doomed!. Doomed, I say!

    Nah. Some of them seem to be swinging away from the Crazy Right–you’ll be fine.

    (P.S. I edited the date in your title again, from 10/17 to 1/17. Want to hire me as your copy editor? I’ll give you a special ATiM rate. 🙂 )

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  11. Michigoose, on January 20, 2014 at 7:35 pm said:

    Yes, Scott. We’re all well aware of your disdain for scientists and peer reviewed publications.

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    • ScottC, on January 20, 2014 at 9:01 pm said:

      Mich:

      Yes, Scott. We’re all well aware of your disdain for scientists and peer reviewed publications.

      The absence of blind faith in or reverence for scientists, especially with regard to highly politicized subjects, is not disdain. And for goodness sake, you were the one who told me about how political the peer review process is.

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  12. jnc4p, on January 20, 2014 at 7:44 pm said:

    Impressive rent seeking, even by NYC standards.

    “When a Loft Is Artists-Only, Deciding Who, Officially, Is an Artist
    JAN. 20, 2014

    …
    Most lofts in SoHo and NoHo, two fashionable neighborhoods in Lower Manhattan, are legally reserved for artists. And not just any kind of artist; only fine artists who create independent, original work, as judged by the committee. Actors, dancers and musicians who interpret other people’s work do not qualify, nor do commercial artists, such as most graphic designers or architects.”

    http://www.nytimes.com/2014/01/21/nyregion/when-a-loft-is-artists-only-deciding-who-officially-is-an-artist.html?hp&_r=0

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  13. Whitaker. Motherfucking. Chambers, on January 20, 2014 at 8:10 pm said:

    Now wait just one damn minute. Scott’s progressivity on matters Science and Scientists makes me look like a Flat-Earther. I have worked with Scientists (in labs and shit)conducting “science” in the past and currently work with MD’s and if there is one thing I’ve learned is be suspicious.

    Very suspicious.

    Wait…did you hear that?

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  14. Michigoose, on January 21, 2014 at 8:26 am said:

    Wow! The President is channeling me!

    “There is a historic connection between some of the arguments that we have politically and the history of race in our country, and sometimes it’s hard to disentangle those issues,” he went on. “You can be somebody who, for very legitimate reasons, worries about the power of the federal government — that it’s distant, that it’s bureaucratic, that it’s not accountable — and as a consequence you think that more power should reside in the hands of state governments. But what’s also true, obviously, is that philosophy is wrapped up in the history of states’ rights in the context of the civil-rights movement and the Civil War and Calhoun. There’s a pretty long history there. And so I think it’s important for progressives not to dismiss out of hand arguments against my Presidency or the Democratic Party or Bill Clinton or anybody just because there’s some overlap between those criticisms and the criticisms that traditionally were directed against those who were trying to bring about greater equality for African-Americans. The flip side is I think it’s important for conservatives to recognize and answer some of the problems that are posed by that history, so that they understand if I am concerned about leaving it up to states to expand Medicaid that it may not simply be because I am this power-hungry guy in Washington who wants to crush states’ rights but, rather, because we are one country and I think it is going to be important for the entire country to make sure that poor folks in Mississippi and not just Massachusetts are healthy.”

    Maybe I need to apply for a job on his speech-writing team.

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    • ScottC, on January 21, 2014 at 9:34 am said:

      Mich/Obama:

      I don’t understand the relationship between Obama’s stated topic – the connection between certain political arguments and the history of race in the US – and his suggestion that it is important for conservatives to understand his concern about leaving it up to the states to expand Medicaid. How is this the “flip side” of progressives who conflate states rights arguments with racism? Nor do I see how understanding his concerns would or should alleviate concerns that he is “this power-hungry guy in Washington who wants to crush states’ rights”. Indeed, I assume he is exactly that precisely because he wants it to be easier for him to unilaterally address the things that concern him when/if they do not concern others in the same way.

      BTW, on this:

      …because we are one country and I think it is going to be important for the entire country to make sure that poor folks in Mississippi and not just Massachusetts are healthy.

      In what way is it important for the entire country? Poor folks in Mississippi are more healthy today than they were, say, 50 years ago. In what way has this been “important” for, say, folks (rich/poor/otherwise) in Massachusetts?

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