Agenda: 2013 Policy Summit on Housing, Human Capital, and Inequality
Thursday, September 19
10:30 A.M. – 11:30 A.M.
REGISTRATION & WELCOME
11:30 A.M. – 1:00 P.M.
LUNCH & OPENING ADDRESS
Sandra Pianalto, President & Chief executive Officer, Federal Reserve Bank of Cleveland
A member of the Federal Open Market Committee, Ms. Pianalto has unique insights on housing finance policy and regulations.
1:00 – 2:30 P.M.
The New Housing Finance System: Are We There Yet?
In this opening plenary session, noted researchers and policy experts will take up the current heated debate over the future of housing finance in this country. In light of recent regulatory changes, how will the new financial environment influence housing finance going forward? What are the points of consensus and contention regarding the roles of the GSEs, the FHA, and private market participants? The plenary participants will discuss the path forward for housing finance and, not least, the implications for low-income households’ access to affordable housing.
Robert Avery, Project Director of the National Mortgage Database, Federal Housing Finance Agency (FHFA)
David S. Scharfstein, Edmund Cogswell Converse Professor of Finance and Banking, Harvard Business School
Susan Wachter, Richard B. Worley Professor of Financial Management & Professor of Real Estate and Finance, The Wharton School of the University of Pennsylvania
2:40 – 4:10 P.M.
CONCURRENT SESSION A
RESEARCH BREAKOUT A1
Affordable Housing, Mortgage Underwriting, and Default: The Case of the FHA
In the past few years, the Federal Housing Administration’s (FHA) market share has increased substantially, as have its default and foreclosure rates. Recently, the White House announced that the FHA may have to make a capital call to the US Department of the Treasury for the first time in its history, prompting debate over the future of the organization. In this session, a panel of experts will discuss the FHA’s financial situation, its role in providing affordable housing, and explore potential policy responses.
Emre Ergungor, Senior Research Economist, Federal Reserve Bank of Cleveland
Summary and Findings The Federal Housing Administration’s mission is to be a targeted provider of mortgage credit for low- and moderate-income Americans and first-time home buyers, leading to homeownership success and neighborhood stability. But is the FHA achieving this mission? This paper reports on a comprehensive study that shows the FHA is engaging in practices resulting in a high proportion of low- and moderate-income families losing their homes. Based on an analysis of the FHA’s FY 2009 and 2010 books of business, the FHA’s lending practices are inconsistent with its mission. The findings indicate: An estimated 40 percent of the FHA’s business consists of loans with either one or two subprime attributes—a FICO score below 660 or a debt ratio greater than or equal to 50 percent (based on loans insured during FY 2012). The FHA’s underwriting policies encourage low- and moderate-income families with low credit scores or high debt burdens to make risky financing decisions—combining a low credit score and/or a high debt ratio with a 30-year loan term and a low down payment. A substantial portion of these loans has an expected failure rate exceeding 10 percent. Across the country, 9,000 zip codes with a median family income below the metro area median have projected foreclosure rates equal to or greater than 10 percent. These zips have an average projected foreclosure rate of 15 percent and account for 44 percent of all FHA loans in the low- and moderate-income zips.
Implications for Policy and Practice The study identified specific reforms to focus the FHA on responsible lending and return it to its traditional mission: Step 1: Target an average 7 percent projected claim termination rate, assuming no house price appreciation or depreciation. Step 2: Stop guaranteeing lower-risk loans and high-dollar-balance borrowers, as this allows for cross-subsidization of those loans with excessive risk. This will also let the FHA step back from markets that can be served by the private sector and allow it to concentrate on home buyers who truly need help. Step 3: Price for risk, since not doing so deprives the borrower of the price information needed to understand the true risk of the loan. Until this is done, the FHA should disclose to the borrower his or her expected claim rate, assuming no house price appreciation or depreciation. Step 4: Implement underwriting that results in the extension of responsible mortgage credit, by balancing down payment, loan term, FICO score, and debt-to-income ratio to achieve meaningful equity.
Summary and Findings The Federal Housing Administration (FHA) has been a flexible tool of government since it was created during the Great Depression. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety additional social goals. It achieved success with some of its goals and had a terrible record with others. Today’s FHA is suffering from many of the same unrealistic underwriting assumptions that have done in so many subprime lenders as well as Fannie and Freddie. The FHA has come under attack for its poor execution of some of its additional mandates and leading commentators have called for the federal government to stop undertaking them. This article takes the long view and demonstrates that the FHA also has a history of successfully undertaking new programs. It also identifies operational failures that should be noted to prevent them from occurring if the FHA were to undertake similar ones in the future. The article first sets forth the dominant critique of the FHA and a history of its constantly changing role. It then addresses the dominant critique of the FHA and evaluates its priorities in the context of legitimate housing policy objectives. It concludes that the FHA has focused on an unthinking “more is better” approach to housing, but that the FHA can responsibly address objectives other than the provision of liquidity to the residential mortgage market.
Implications for Policy and Practice Leading commentators on the FHA do not fully appreciate the extent to which down payment requirements alone drive the success and failure of new FHA initiatives. Central to any analysis of the FHA’s role is an understanding of its policies relating down payment size. Much of the FHA’s performance is driven by its down payment requirements, which have trended ever downward so that homeowners were able to get loans for 100% of the value of the house in recent times. As is obvious to all, the larger the down payment, the safer the loan. What appears to have been less obvious is that very small down payments are unacceptably risky. Given that the FHA insures 100% of the losses on its mortgages, the down payment requirement is a key driver of its performance. From an underwriting perspective, 20% is clearly desirable as the risk of default is very low even in a down market. But from an opportunity perspective, a 20% down payment requirement would keep large swaths of potential first-time homeowners from entering the market. If down payments are set too high, than an important social goal may be left by the wayside. So it is important that the public discourse weighs the costs and benefits of setting a fixed down payment requirement versus taking a risk layering approach to down payments. In either case, the FHA must balance the goal of safe underwriting with the goal of making homeownership available to households who could maintain it for the long term.
Summary and Findings A major headwind during the economic recovery was the contraction in residential investment as well as the weakness in consumer demand resulting from the housing crisis. The recent increases in house prices across most housing markets are welcomed and support the growing optimism about the near-term economic outlook. In some markets, the magnitudes of these recent price increases have been quite large and raise the question of whether they may presage a return of speculative concerns. We evaluate these concerns by looking at the evolution of rent/price and price/replacement cost ratios in these markets. We also investigate the impact of the still low transaction volumes in most housing markets on the estimated repeat-sale price increases
Implications for Policy and Practice Interpreting recent house price dynamics is important for arriving at a correct assessment of the health of local housing markets. The impact of development in housing on the broader macro economy also depends on these assessments.
RESEARCH BREAKOUT A2
Small Business Trends and Policies after the Great Recession
Research shared in this session will give participants a detailed view of what characterizes small businesses and small business employment, clarifying long-held misconceptions on the topic and possible implications in policymaking. The session will also include an analysis of the effectiveness of a large-scale entrepreneurship training program and what it means for policy.
Lockwood Reynolds, Assistant Professor, Kent State University
Summary and Findings This paper documents the role of the collateral lending channel to facilitate small business starts and self-employment in the period before the financial crisis of 2008. We document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries. This increase in small business employment was particularly pronounced in (1) industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral; and (2) manufacturing industries where goods are shipped over long distances, which rules out that local demand is driving the expansion. We show that this effect is separate from an aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation.
Implications for Policy and Practice This paper documents the role of the collateral lending channel to facilitate small business starts and self-employment in the period before the financial crisis of 2008. We document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries. This increase in small business employment was particularly pronounced in (1) industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral; and (2) manufacturing industries where goods are shipped over long distances, which rules out that local demand is driving the expansion. We show that this effect is separate from an aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation.
Ruth Uwaifo Oyelere, Assistant Professor, Georgia Institute of Technology Black-White Gap in Self-Employment. Does Intra-Race Heterogeneity Exist?[ summary & implications ]
Benjamin Pugsley, Economist, Federal Reserve Bank of New York What Do Small Businesses Do?
Summary and Findings Past research on the determinants of self-employment in the U.S. has emphasized the importance of ethnicity. In particular, self-employment rates for Blacks lag far behind those of other racial groups for comparable individuals. Institutions matter and their impacts are long lived. At the same time, information is also important and affects individuals’ preferences. We hypothesize that part of the lag in Blacks’ self-employment rates may be explained by the effects of past institutions and the information created from past institutional shocks. If this hypothesis is correct, we should find that those who did not experience institutional shocks directly or indirectly should exhibit different preferences from those who did, despite similar racial background. In addition, we expect that those who experienced such shocks indirectly should also exhibit preference differences from those directly affected, given that their preferences will also be influenced by their own experiences and information reflecting current conditions. This is the motivation for our two questions of interest: Does the dummy variable coefficient associated with the Black–White self-employment gap exhibit intra-race heterogeneity? Second, does this variable have diminished or increased impact across generations? We find evidence of intra-race heterogeneity. We also find evidence of differences in the probability of entrepreneurship across different birth cohorts of African-Americans.
Implications for Policy and Practice These results provide two direct policy applications. First, targeting African Americans and educating them about the current opportunities available in self-employment is necessary. There are alternative ways this can be done, but local forums aimed at discussing why Black businesses failed in the past and the constraints they face today are useful in changing current information on possible business failure for African Americans. Second, providing incentives is useful. Ultimately, people respond to incentives and given the negative institutional shocks faced by African Americans in the past, which may have led to a heightened apprehension about the risks of self-employment, thinking of innovative ways to incentivize African Americans towards entrepreneurship should be useful.
PRACTITIONER BREAKOUT A3
Getting the Right Balance: Generating Income and Achieving Savings in a Post-Recession World
Household balance sheets are all about income and assets (what you earn and what you own) versus debt and spending (what you owe and what you consume). In addition to income, savings play an integral role in family financial stability. This session will look at the current state of household balance sheets following the recession and delve into the components of the balance sheet. It will also attempt to answer two questions: What programs help those with less-robust balance sheets generate income? And what tools are available to low- and moderate-income individuals to facilitate saving?
David Rothstein, Director of Resource Development & Public Affairs, Neighborhood Housing Services of Greater Cleveland, and Project Director, Ohio CASH Coalition
Tamara Lindsay, Director of Programs, NYC Department of Consumer Affairs Office of Financial Empowerment (OFE).
Joanna Smith-Ramani, Director of Scale Strategies, Doorways 2 Dreams (D2D) Fund
Lauren Williams, Program Manager, Affordable Homeownership & Entrepreneurship, Corporation for Enterprise Development (CFED)
PRACTITIONER BREAKOUT A4
In a Pinch: Access to Affordable Short-Term Credit
Access to mainstream sources of consumer credit is a challenge for many low- and moderate-income households. To fill gaps in monthly expenses and income, some turn to small dollar credit products such as payday loans. While these products meet consumer needs, it is often at a high cost to borrowers. Panelists in this session will discuss why consumers use these products despite the costs, the availability of small dollar credit products and the impact of regulation on them, and some innovative and more affordable approaches to fulfilling the short-term credit needs of consumers.
Rob Levy, Director of Research, Center for Financial Services Innovation
Sarah Davies, Senior Vice President, Analytics, Product Management and Research, VantageScore Solutions, LLC
Ryan Gilbert, Co-Founder and Chief Executive Officer, BillFloat
Michael Griffin, Senior Vice President, KeyBank
LEARNING BREAKOUT A5
QM & QRM: What it Means for Bankers
A key contributor to the financial crisis was the proliferation of mortgages made with lax underwriting standards which were then securitized. The Dodd-Frank Act imposes new legal requirements on both mortgage originators and mortgage securitizers. These requirements include an exemption for securitizing Qualified Residential Mortgages (QRMs) and a safe harbor for originating Qualified Mortgages (QMs). Many originators and securitizers are expected to originate and securitize only mortgages that meet the QM and QRM standards, thus having a profound effect on residential mortgage lending. This interactive session will examine the new QRM and QM standards, as well as the impact on borrowers and implications for fair lending. It will also address the difference between the safe harbor for prime QRMs and the rebuttable presumption of compliance for higher-priced mortgage loans (HPML), and the implications for the Community Reinvestment Act and TILA’s civil liability provisions.
Greg Bell, Consumer Compliance Banking Supervisor, Federal Reserve Bank of Cleveland (Cincinnati Branch)
Ken Benton, Senior Consumer Regulations Specialist, Federal Reserve Bank of Philadelphia
4:15 – 5:45 P.M.
CONCURRENT SESSION B
RESEARCH BREAKOUT B1
Consumer and Household Finance
This session focuses on consumer and household finance, with particular attention paid to consumer behaviors and financial implications. The speakers will specifically address household borrowing behavior through the housing boom and bust, the substitution between mortgage and non-mortgage debt, the consumption response to tax refunds, and the benefits and costs of checking accounts as they are actually used by low- and moderate-income households.
Dan Hartley, Research Economist, Federal Reserve Bank of Cleveland
Summary and Findings We investigate the impact of large swings in the housing market on non-mortgage borrowing, using CoreLogic geographic house price variation and Equifax-sourced Federal Reserve Bank of New York Consumer Credit Panel data for 1999 to 2012. First-differenced instrumental variables estimates indicate that all homeowner types increased both housing and non-housing debt in response to the housing boom. However, older and prime homeowners responded to house price changes by reallocating obligations between home equity and credit card debt, with little change in total debt, during both the comparatively stable 1999-2001 period and the 2007-2012 downturn. Younger and marginally creditworthy homeowners’ non-mortgage debts moved with house prices during both expansions and downturns. These results suggest meaningful wealth effects of the housing market on consumption only for the boom period, but collateral effects throughout. A difference-in-differences estimation approach yields similar results. Finally, despite broad speculation, we find little substitution out of home equity debt into student loans in response to recent house price declines.
Implications for Policy and Practice Our findings address the nature of both debt and consumption responses to movements in the housing market, in good economic times and bad. Understanding whether and which homeowners adjust consumption in response to changes in housing wealth may help us understand the path of the recovery. Further, our failure to uncover evidence of meaningful substitution out of home equity debt into student loans from 2007-2012 suggests that a housing market recovery may do little to curb the rapid growth of U.S. student debt.
Summary and Findings Economic models typically assume that households adjust their consumption based on new information rather on the actual receipt of funds (e.g., Laibson 1997). Empirical studies, however, find evidence that appears to contradict the theory. Specifically, the common result is that households react to actual cash flows. For example, households consume more following the regular receipt of monthly paychecks or social security payments (Stephens 2003, 2006), following tax return refunds (Souleles 1999), and following tax rebates (Agarwal, Liu, and Souleles 2007). One possibility is that households would like to respond to expected cash flows—as the theory predicts—however, they are bound to do so due to financial constraints. This idea is supported by the evidence of Zeldes (1989) that the correlation between income and consumption is weaker for financially constrained households. While this evidence is suggestive of the importance of financial constraints in household consumption decisions, there is no direct evidence showing that financial constraints prevent households from responding to expected cash flows. The main contribution of the study is the empirical setting: instead of examining the reaction of households only to the cash receipt event, we augment the analysis and document the response of households to the information event. We use a novel setting surrounding the filing date (information date) and receipt date of actual federal tax refunds.
Implications for Policy and Practice By providing more evidence on how consumers react to news and realization of income changes and how it interacts with credit constraints, we hope to help the evaluation and the design of policies that have an impact on the household income such as tax rebates and labor regulation.
Katherine Samolyk, Senior Economist, Consumer Financial Protection Bureau (CFPB)
presentation pdf Checking Account Activity, Account Costs, and Account Closure among Low- and Moderate-Income Households[ summary & implications ]
Summary and Findings This study uses proprietary data for a large random sample of consumer checking accounts at several depository institutions to examine the costs associated with checking account use and usage patterns that pose greater account-closure risks. We have unique information related to account ownership, including balances in other accounts with the bank and whether the account is opted-in to having standard overdraft coverage of debit card and ATM transactions. We also have 18 months of data on each debit and credit to the account. We use census data on the characteristics of the tract where the account holder resides. We conduct tests of factors associated with the incidence of overdraft-related fees and with involuntary account closure. Our findings indicate that being opted into debit card and ATM overdraft coverage is a key factor that predicts whether an accountholder had overdraft-related fees. We find that, in general, having “overdraft protection” in the form of a deposit account linked for the purpose of overdraft coverage was associated with lower overdraft-related costs; however customers having linked accounts with low balances tended to incur higher costs than customers with no linked accounts. Not surprisingly, we find that overdraft fees are a primary predictor of involuntary account closure. However, we also find that controlling for account-related factors, there are differences in checking account outcomes associated with tract demographics.
Implications for Policy and Practice There is a growing body of research indicating that LMI households tend to be disproportionately represented among the unbanked and underbanked populations. A key goal of this study is to increase our understanding of banked LMI households and the costs and risks associated with bank account use. To this end, we focus on how account costs and account closures are related to the characteristics of the census tracts where the account holders reside. Our findings suggest that banked customers experiencing negative account outcomes may not look all that different from households that use alternative financial services (AFS) providers. In terms of univariate patterns, account holders residing in LMI neighborhoods were more likely to have overdraft-related fees and to experience involuntary account closure. They also tended to have lower monthly deposits and were less likely to have accounts linked for the purposes of overdraft protection than other account holders. In tests that control for account-related factors, we continue to find that account holders in LMI neighborhoods are more likely to incur worse outcomes. However, including tract characteristics measuring homeownership rates, household type, educational attainment, and racial composition attenuates the link between tract income and account outcomes. The tract characteristics associated with negative account outcomes are similar to those that researchers have found associated with the use of AFS credit products.
RESEARCH BREAKOUT B2
Improving the Mortgage Origination Process
How fair is the mortgage origination process? This session will present one experiment and two program evaluations related to this process. The experiment investigates discrimination by mortgage originators; the evaluations address effectiveness of specific interventions in the mortgage origination process, as well as regulations governing it. The session aims to advance the discussion of ways to make the mortgage origination process fairer and the resulting mortgages sustainable. (A complementary practitioner session is offered on Friday: Breakout Session C3, “At a Crossroads: The Changing Mortgage Industry.”)
Lei Ding, Community Development Economic Advisor, Federal Reserve Bank of Philadelphia
Summary and Findings We test for racial discrimination using a matched-pair correspondence experiment on Mortgage Loan Originators (MLOs). Our matched-pair experiment examines the response MLOs offer to initial contact from a potential client interested in obtaining information about a mortgage loan. We design the experiment to test for differential treatment by client race (white or African American) as well as differential treatment by credit score. Our results show that MLOs discriminate on the basis of race, and treat clients differently by their reported credit score. We find that on net, 1.8 percent of MLOs discriminate by not responding to inquiries from African Americans while responding to inquiries from white clients. We find larger net response differences across credit score types, with 8.5 percent of MLOs responding to the high credit score group while not responding to the no credit score group, and 4.0 percent of MLOs responding to the high credit score group while not responding to the low credit score group. We also find that credit score differences exacerbate differences in differential response between races. Examining the content of the response shows that whites are favored even among MLOs that respond to both inquiries. The primary difference in the content of response between whites and African Americans is the inclusion of details about the loan.
Implications for Policy and Practice Finding discrimination in the lending market is likely to influence outcomes for minority borrowers throughout the home buying process. If African American borrowers are less likely to receive communication from an MLO and the MLO treats them differently when communication does occur, it makes submitting a loan application more difficult, and the remainder of the home purchase more arduous. In addition, our work shows that the growing importance of e-mail communication between clients and lenders, where in-person meetings are less and less common, does not mean that discrimination on the basis of race will not occur. The magnitude of discrimination we find is smaller than in recent in-person studies; however, the standard for compliance is much lower in our most basic test—we examine only if MLOs are willing to respond to an e-mail. Our findings confirm that discrimination still exists in the lending industry, and that it exists across a larger sample and a broader geographic scope than previous studies show. From a policy perspective, our results suggest that examining lending outcomes is not sufficient to uncover the level of discrimination that minorities face in the lending process. Our work also suggests that to uncover the full extent of discrimination in this market, multiple types of communication should be used in addition to in-person audits, and that enforcement of fair lending laws would be more robust if audits included other means of communication.
Lan Shi, Senior Research Associate, The Urban Institute
presentation pdf The Effect of Mortgage Broker Licensing On Loan Origination Standards and Defaults under the Originate-to-Distribute Model: Evidence from the U.S. Mortgage Market[ summary & implications ]
Summary and Findings By exploiting state-level variations, we examine whether stricter licensing requirements for loan brokers raise lending standards and consequently improve loan performances. Using data on private label securitized loans, we find that the requirements on registration, surety bonds, net worth, work experience, education, exam, and continuing education are all effective in raising loan origination standards. Requirements placed on employees are as effective as those on licensees. The effect is larger for subprime, low/no-doc, cash-out-refinance loans, and high-minority neighborhoods.
Implications for Policy and Practice These findings point to the value of broker regulation when lenders' incentives to screen are compromised under the originate-to-distribute model.
Summary and Findings Neighborhood Reinvestment Corporation (doing business as NeighborWorks America, or NeighborWorks) has a nationwide network of affiliates offering pre-purchase homebuyer counseling throughout the country. Although the network members started to provide pre-purchase counseling in 1978, the impact of these services on mortgage performance has not yet been formally evaluated. Using information on about 75,000 loans originated between October 2007 and September 2009, Neil Mayer and Associates, together with Experian, analyzed the impact of pre-purchase counseling and education provided by NeighborWorks’ network based on the performance of counseled borrowers’ mortgages. It compares mortgage performance for counseled buyers over two years after the mortgages are originated to mortgage performance of borrowers who received no such services.
Implications for Policy and Practice The findings show that NeighborWorks’ pre-purchase counseling and education works: Clients receiving pre-purchase counseling and education from NeighborWorks organizations are one-third less likely to become 90+ days delinquent over the two years after receiving their loan than are borrowers who do not receive pre-purchase counseling from NeighborWorks organizations. The finding is consistent across years of loan origin, even as the mortgage market changed in a period of financial crisis. It applies equally to first-time homebuyers and to repeat buyers. The findings support continued support for pre-purchase counseling. The results show positive effects of counseling taking place throughout the U.S., by a large number of separate non-profit organizations, rather than in a single place or organization. At the same time, the fact that the NeighborWorks’ network has common counseling standards provides for some consistency in the counseling services provided. Further work on the role of the specific nature of the counseling in determining performance, on performance over a longer period following loan origination, and on the indirect impacts of counseling through their effect on mortgage product choice could well be fruitful future directions for research.
PRACTITIONER BREAKOUT B3
Putting a Lid on It: Addressing Student Loan Debt
What’s behind increasing student loan debt and how does it affect the near- and long-term financial well-being of borrowers? This session will address whether the investment in human capital is worth it for all students and what educational institutions and policymakers have done to address increasing costs. Finally, the panelists explore whether there are any alternative approaches to financing higher education. (A complementary research session is offered on Friday: Breakout Session C1, “Student Loans.”)
Wenhua Di, Senior Economist, Federal Reserve Bank of Dallas
Bryan Ashton, Senior Program Coordinator, Student Wellness Center, The Ohio State University
Justin Draeger, President, National Association of Student Financial Aid Administrators
Scott Karol, Director of Program Evaluation and Technology , Clarifi
PRACTITIONER BREAKOUT B4
Nontraditional Tools in the Neighborhood Stabilization Toolbox
The housing crisis has spurred a number of responses from the federal government, such as programs encouraging modifications and refinancing of distressed mortgages. Additionally, some communities are finding value in nontraditional means of stabilizing their neighborhoods, including shared-equity homeownership, community land trusts, private investors buying and rehabbing homes, and attracting more people to areas that suffered population declines. This session features researchers and policy experts on community land trusts, shared equity models, private sector investments in neighborhoods, and policies aimed at attracting immigrant and refugee populations to once-declining areas. How do these models work and in what conditions are they designed to succeed? What role can regulations play in furthering such efforts?
Moderator & Speaker:
Lou Tisler, Executive Director, Neighborhood Housing Services of Greater Cleveland
Shelly Callahan, Executive Director, Mohawk Valley Resource Center for Refugees, Utica, NY
Sean Dobson, Chief Executive Officer and Chairman, Amherst Holdings, LLC
Dodd-Frank: How Banks are Coping with the Cost of Compliance
This session features industry representatives’ perspectives (from a community bank, regional bank, and large banking organization) on how they are managing the costs of complying with consumer regulations resulting from the Dodd-Frank Act. How have these new regulations impacted the respective organizations’ product and service offerings? What regulations are giving them the most challenges?
Greg Bell, Consumer Compliance Banking Supervisor, Federal Reserve Bank of Cleveland (Cincinnati Branch)
Michael Little, Chief Compliance Officer, PNC Financial Services Group
Judy Steiner, Executive Vice President and Chief Risk Officer, FirstMerit Corporation
Trent Troyer, President & Chief Executive Officer, First Federal Community Bank
5:45 – 7:00 P.M.
Friday, September 20
8:00 – 9:00 A.M.
Shining a Light on Regulatory Enforcement
Join us for an interactive discussion over breakfast with a panel of federal and state regulators who will shed light on the gray area of policy known as regulatory enforcement. What factors are considered when agencies plan their enforcement strategies? How do agencies balance the potential unintended consequences that can result from blunt enforcement policies? The panelists’ brief presentations will be followed by a facilitated discussion, providing the audience with the opportunity to participate.
Paul Kaboth, Vice President and Community Development Officer, Federal Reserve Bank of Cleveland
Nadine Ballard, Associate Professor, Sinclair Community College
Kristen Donoghue, Assistant Deputy Director for Policy and Strategy, Office of Enforcement, Consumer Financial Protection Bureau
Jon Steiger, Regional Director, Federal Trade Commission
9:00 – 10:30 A.M.
Consumer Finances and Protection in the New Regulatory Environment
When does consumer protection work best? Some argue that consumers need as much protection from themselves as from profit-seeking companies. In this plenary session, national policy experts will discuss consumer protection in the new regulatory environment with a particular focus on the values and limits of regulations and mandatory information disclosures. When does the cost of product oversight outweigh the benefits? And how may the new rules affect the finances of low-income consumers?
Mark Sniderman, Executive Vice President and Chief Policy Officer, Federal Reserve Bank of Cleveland
Michael Barr, Professor of Law, University of Michigan Law School
Vanessa Perry, Chair and Associate Professor of Marketing, George Washington University
Jonathan Zinman, Visiting Scholar, Federal Reserve Bank of Philadelphia and Professor, Dartmouth College
10:40 A.M.– 12:10 P.M.
CONCURRENT SESSION C
RESEARCH BREAKOUT C1
According to a recent report from the Federal Reserve Bank of New York, student debt was the only type of household debt that continued to rise through the Great Recession. By the end of 2012, almost a third of student loans in the repayment period were delinquent. Research presented in this session explains why, in spite of growing tuition fees and debt, there is no evidence in favor of a student loan bubble. This session also presents work on borrowers’ behavior with respect to their student loan debt when faced with other types of debt, as well as an analysis of regulations and policies to reduce the risks associated with educational investments. (This research session is a complement to Practitioner Session B3, “Putting a Lid on It: Addressing Student Loan Debt.”)
Vyacheslav Mikhed, Industry Specialist, Payment Cards Center, Federal Reserve Bank of Philadelphia
Daniel Kreisman, Postdoctoral Research Fellow, Gerald R. Ford School of Public Policy at the University of Michigan Student Loans: Debt Crisis or Repayment Crisis
Lance Lochner, Professor and Director, CIBC Centre for Human Capital and Productivity, Western University (Canada)
presentation pdf Credit Constraints in Education
Summary and Findings Federal Student Loan programs were established in the mid twentieth century to increase the supply of skilled labor, promote economic and technological development, and provide upward socio-economic mobility. However, Federal Student Loan programs have not incorporated many recent insights from financial, developmental, and labor economics that distinguish between different types of education. Because of this, Federal Student Loan programs and, more broadly, U.S. labor markets are not performing at their full potential. There is a mismatch between the skills workers have and employers’ needs, and this mismatch contributes to structural unemployment, reduced output, and higher student loan defaults. This mismatch is exacerbated by information asymmetries and perverse incentives of educational institutions to channel students toward the least expensive—and typically lowest value—fields of study.
Implications for Policy and Practice This article argues that risk-based pricing of Federal Student Loans would increase efficiency. Risk-based pricing of student loans would signal the long-term financial risks inherent in different courses of study. This price signal would likely improve students’ ability to make informed decisions about the course of study that would best balance their innate abilities and individual preferences with postgraduate opportunities. Similarly, price signals would enhance post-secondary educational institutions’ ability to adjust their programs to improve their students’ prospects. Allocating educational resources more efficiently would enhance the productivity and competitiveness of the U.S. labor force. Over the long term, such efficiencies could increase the resources available for further investment in education and research. Transparent, risk-based student loan pricing could greatly benefit students and educational institutions, particularly if it were data-driven and sensitive to the values of equal opportunity and independent research that are central to the academic enterprise. This article discusses legal and policy reforms that could facilitate risk-based student loan pricing, potential hazards from a shift toward risk-based pricing, and safeguards that could help protect students and educators from abuse.
RESEARCH BREAKOUT C2
Mortgage Defaults and Labor Markets
The papers in this session will report on research that examines the interaction between mortgage and housing markets and labor markets. They will also examine the relationship between unemployment, unemployment insurance, and mortgage default at both the micro and macro levels.
Timothy Dunne, Research Economist and Policy Advisor, Federal Reserve Bank of Atlanta
Kyle Herkenhoff, PhD Candidate, Department of Economics, University of Californi, Los Angeles Foreclosure Delay and U.S. Unemployment[ summary & implications ]
Summary and Findings Through a purely positive lens, we study and document the growing trend of mortgagors who skip mortgage payments as an extra source of "informal" unemployment insurance during the 2007 recession and the subsequent recovery. In a dynamic model, we capture this behavior by treating both delinquency and foreclosure not as one period events, but rather as protracted and potentially reversible episodes that influence job search behavior and wage acceptance decisions. After calibrating, we find that the observed foreclosure delays increase the unemployment rate by an additional ½ percent. With delays, the stock of delinquent loans more than doubles. On the positive side, by providing more self-insurance, households enter better employment matches, which increases both output and homeownership.
Implications for Policy and Practice With plausible economic turbulence, we find significant and persistent effects from the foreclosure delays on the unemployment rate. We also find that foreclosure delays increase both output and homeownership. By quantifying the relative magnitudes of each of these benefits and drawbacks, we provide policy makers with the ability to make better-informed decisions regarding mortgage intervention. These results imply that if there are two economic targets, homeownership and employment, the mortgage interventions studied in this paper improve progress along one dimension while detracting along the other. While the relative weights placed by policy makers on these targets ultimately guides the policy prescription, further normative work is required in a General Equilibrium framework capable of producing welfare numbers.
Summary and Findings This paper examines the impact of unemployment insurance (UI) on credit markets. Exploiting heterogeneity in the generosity of unemployment insurance across U.S. states and over time, we find that UI helps the unemployed avoid defaulting on their debt. For every $1,000 increase in maximum UI benefits, mortgage delinquency drops by 2 percent and the eviction rate drops by 10 percent among unemployed homeowners. We also find that lenders respond to this decline in default risk by expanding credit access for low-income households who are at risk of being laid off. For every $1,000 increase in maximum UI benefits, low-income households are offered $900 (4%) more in credit card debt as well as lower interest rates on credit cards and mortgages (0.5% reduction). These results show that the poor benefit from the insurance provided by a stronger social safety net even without experiencing a negative shock.
Implications for Policy and Practice Our results imply that unemployment insurance payments can play an important role in mitigating mortgage delinquency and default. This finding is particularly notable in light of the recent housing downturn, during which policies such as the HAMP mortgage modification program were put in place to help distressed mortgage borrowers and avoid foreclosures. Compared to the HAMP program, unemployment insurance payments are an order of magnitude larger. While HAMP is estimated to disburse $16 billion, unemployment insurance payments over the last five years have exceeded $500 billion, in large part due to federally financed extensions of unemployment benefits periods.
Chao Yue Tian, Research Associate, University of North Carolina at Chapel Hill
presentation pdf Differential Impacts of Structural and Cyclical Unemployment on Mortgage Default and Prepayment[ summary & implications ]
Summary and Findings The Great Recession (fourth quarter of 2007 through the second quarter of 2009) has been characterized by high rates of foreclosures and unemployment. Using a sample of community reinvestment loans, we examine the impact of structural unemployment and cyclical unemployment on mortgage terminations (default and prepayment). We find that mortgage default and prepayment are more sensitive to structural unemployment than cyclical unemployment. In addition, depending on whether structural unemployment is high or low, borrowers and lenders react differently to incentives to terminate a loan.
Implications for Policy and Practice In sum, this study provides empirical evidence of the link between long-run or structural unemployment and mortgage termination through default and prepayment. The results indicate that if attempts to intervene in the labor market are to have meaningful impacts on mortgage markets, the intervention should be targeted at structural components of local unemployment.
PRACTITIONER BREAKOUT C3
At a Crossroads: The Changing Mortgage Industry
In the wake of the Dodd-Frank Act, the mortgage regulatory environment is changing dramatically. Join us as we explore how the current environment is affecting mortgage lending and how upcoming regulatory changes will impact mortgage credit in the future. Panelists will discuss the key mortgage regulations and what the implications are for borrowers, lenders, and communities as the market adjusts. (This practitioner session is a complement to Research Session B2, “Improving the Mortgage Origination Process.”)
Ernie Hogan, Executive Director, Pittsburgh Community Reinvestment Group
Ken Benton, Senior Consumer Regulations Specialist, Federal Reserve Bank of Philadelphia
Diane Minunni Callan, Vice President, Regulatory Information Services, TD Bank
PRACTITIONER BREAKOUT C4
Small Business Financing Trends
Recent discussions about small business have focused on the challenges they face obtaining credit in today’s marketplace. In this session, experts will discuss the frictions slowing the flow of this credit, as well as the variety of ways and recent trends in how small businesses are operating and obtaining financing.
Anita Campbell, Chief Executive Officer, Small Business Trends, LLC
Those are the dates of the 2014 Reinventing Older Communities conference, "Bridging Growth and Opportunity." The biennial conference, sponsored by the Federal Reserve Bank of Philadelphia in partnership with the Cleveland Fed and others, will be held next May at the Loews Philadelphia Hotel. Check out highlights and a summary from the 2012 event, "Building Resilient Cities."
“What we need to think about is how to scarcity-proof a world that’s just imposing on people with limited bandwidth.”