Preventing Another Subprime Mortgage Crisis

I think this article describes the origins of the mortgage crisis as good as any, and outlines the drawbacks of any bailout. However, I’m interested in the root of the problem. What can we do to minimize the number of foreclosures to begin with?

First, a bit on where we are. Although hard facts are hard to come by, the best data indicates the subprime crisis will continue through this year, and perhaps longer. This chart from an IMF report shows that the majority of subprime loans resets will have ended, but the next three years the rates on a number of option adjustable rate and alternative (“Alt-A”) mortgages will also reset. Although considered better quality than subprime loans, option adjustable rate loans can feature increasing minimum payments if borrowers have been choosing to pay the minimum. The worsening economic picture won’t help, and the dry language of the IMF puts it this way: “borrowers experiencing payment difficulties are expected to have fewer refinancing options, since falling house prices reduce the amount of homeowner equity, while tighter lending standards limit the range of mortgages available to nonprime borrowers.”

What regulations could be considered?

Some argue greater disclosure requirements are needed. An Ann Arbor attorney complains the HUD-1 form, the standard disclosure form for all mortgages, needs improvement:

While RESPA has standardized the information available in mortgage transactions somewhat through the familiar HUD-1 or settlement statement, much of the information is still very hard to decipher and true costs of a loan are often obscured. The Good Faith Estimate that RESPA requires is toothless since there are no penalties for errors, and is often used to bait borrowers with attractive terms that are then switched into unfavorable, expensive loans at closing.

Barack Obama also proposes additional disclosure requirements through something he calls a Homeowner Oblication made Explicit (HOME) score, stating “today’s subprime mortgage problem stems in large part from the lack of easy-to-understand information that borrowers receive from mortgage brokers.” His score would

provide potential borrowers with a simplified, standardized borrower metric (similar to APR) for home mortgages. The HOME score will allow individuals to easily compare various mortgage products and understand the full cost of the loan. The HOME score would also help borrowers understand their long-term obligations and would be required to include mandatory taxes and insurance.

Others place blame on brokers who profit from selling mortgages, and propose broker regulations. This report on the racial disparities in mortgage lending describes the problem well:

Brokers do not work on behalf of the borrower or the wholesale lender or investor who funds the loan. Instead they receive compensation from the borrower in the form of origination fees and points, and often they receive an origination fee from the mortgage banker at the time that the loan is funded. A mortgage delivery system wherein brokers are compensated for making loans but have no long-term interest in loan performance is subject to what economists call “principal agent risk.” A broker (the agent) has little or no incentive to worry about whether the information presented in the mortgage application is accurate as long as the information gathered is sufficient to cause the mortgage banker (the principal) to fund the loan, triggering payment of the broker’s fees (which is not to suggest that all mortgage brokers mislead borrowers; many work hard on behalf of borrowers to match them with the best product). Without a long-term interest in the performance of the loan, brokers are immune from the potential adverse consequences of both failing to match the borrower with the best available mortgage and failing to provide accurate data to underwrite the loan. Both affect the odds that the loan will default, which can have devastating consequences for the borrower.

The article continues to explain reports show broker-originated loans are more likely to default than retail loans, even after controlling for credit and income. A separate study concluded setting a higher minimum net worth requirement for brokers is associated with fewer subprime loans and foreclosures. Rules regulating mortgage brokers vary widely by state, which may explain why the foreclosure crisis has been so uneven by state, with some states being particularly hard hit. I found this map a striking illustration of the uneven pattern.

However, even while showing that more regulations is statistically associated with fewer foreclosures, the paper cited above showing regulations cut foreclosures warns against possible “unintended negative consequences.” Here’s the crux of the regulation problem — in a quest to maximize home ownership, the federal government has socialized the risk (through mortgage insurance and occasional bailouts) and cut mortgage regulations to push mortgages out to the maximum number of people. Because no market is self-regulating, when lenders go too far taxpayers are left holding the bag in the form of bailouts of banks or the GSEs.

I support more aggressive measures than are generally discussed. Hard limits should be set on the terms of the most usurious “exotic” mortgages, brokers more tightly regulated, and some loans prohibited. The Center for Responsible Lending is rare in their support of prohibitions of certain loans to people with bad credit.

Of course, many argue additional reforms are needed in the financial markets to restrain the market demand for bad mortgages, but this goes way beyond my expertise. What regulations do you think are needed?

The D.C. Urban Blogosphere Revisited

Since my original post on the topic way back in 2006, the D.C. urban and real estate blogosphere has evolved somewhat. However, only recently were there enough changes to convince me the topic deserved to be revisited.

Read the rest of this entry »

Does Washington Need a Planning Commission?

Planners from other cities are often surprised when I tell them that Washington, D.C. does not have a planning commission. Thanks to the city’s unique legacy as the home to the federal government, it boasts a convoluted system for regulating new building in the city that lacks a central planning body. The system is so complex that at times the city government itself forgets to enforce existing laws, and major new buildings on the National Mall can “take most Washingtonians and most Americans by surprise.”

Let’s take a quick look at who’s involved. Starting at the federal level, the National Capital Planning Commission oversees all federal construction in the capital region, as well as creating long-term comprehensive plans focusing heavily on the location of the federal government. However the limited authority of the agency means the plan has little direct influence over private development in the city. For example, NCPC plans have proposed far-ranging ideas including a new mall along South Capitol Street that one blogger has even dedicated his site to discussing. I previously compared the NCPC’s hazy vision of the future with science fiction visions for our city.

While NCPC does not review private construction, another federal agency does review the aesthetics of some private construction. Private buildings in certain sections of the city (mostly abutting or facing federal property like Rock Creek Park and Pennsylvania Avenue) are subject to review by the U.S. Commission on Fine Arts under the Shipstead-Luce Act. It was a mix-up over this act that forced the District to purchase and tear down a private home last year.

For their part, the city’s Office of Planning (organized in the city government’s executive branch) creates a wide range of neighborhood and citywide plans including the recently completed 2006 Comprehensive Plan of the National Capital. The Mayor’s Deputy Mayor for Planning and Economic Development oversees redevelopment plans and other special programs. The District Department of Transportation creates special transportation plans and oversees the planning of transportation infrastructure. Construction in any of the city’s many historic districts is regulated by the Historic Preservation Review Board.

Construction not subject to the specific bodies above is regulated by the Department of Consumer and Regulatory Affairs that can issue a building permit for by-right construction conforming to the city’s zoning. Any planned unit developments or nonconforming projects must come before the quasi-autonomous Zoning Commission, and can be appealed to the Board of Zoning Adjustment.

Given this backdrop, the Washington Business Journal recently published two columns in their OnSite magazine arguing for and against creating a new planning commission. Dorn C. McGrath Jr., a professor emeritus from George Washington University, argues explaining this convoluted structure could be a primary task for the commission. He also thinks such a commission would help oversee the maintenance and development of city facilities, arguing, “It seems that ‘smart growth’ now extends only to the low-hanging fruit of new condo and shopping center development, rather than the untidy business of planning for needed parks, recreation facilities, vehicle storage and maintenance and schools.”

Arguing against is Ellen McCarthy, who served as director under the Office of Planning for Mayor Anthony Williams. She boasts the city already has a “high-functioning planning structure” and questions the benefit of adding a new commission to the mix.

While I don’t think it is likely a commission will be created anytime soon, the debate is important because it sheds light on advantages and drawbacks of the existing system. The two viewpoints are shown below.

Does D.C. need a planning commission?

Yes by Dorn C. McGrath Jr.

D.C. urgently needs what a planning commission might one day provide, but now is not the time. A planning commission needs the political support of the mayor, and recent events tell us a planning commission is on the mayor’s back burner, if on the stove at all.

Why does the District need a planning commission? It would help educate the city government, developers and citizens in every neighborhood about the planning process, which currently is not well understood. Yes, we have a comprehensive plan, but it is, in effect, a triumph of good graphics and ballyhoo over substance. A planning commission could help citizens and public officials understand this and set their sights higher. The D.C. Council vacuously cites the comprehensive plan, but always manages to find a way to defer final action on anything the plan suggests. Then, in haste, it adopts whatever has emerged. This amounts to political flatulence, rather than legislating as the law requires.

A planning commission for the District would provide some parity with the National Capital Planning Commission, a heavily funded agency interested primarily in the federal government’s holdings. The NCPC also calls the shots, ultimately, on whatever the local planning and development office produces in the way of a comprehensive plan.

There is no legal barrier to the city establishing a planning commission. The power of the mayor to do exactly this was confirmed in a 2003 legal opinion by Covington & Burling. Copies of that memorandum of law written for the Committee of 100 were furnished to members of the Council, then-Mayor Tony Williams and Office of Planning officials. They ignored it. The same memorandum was given to the current mayor and his director of planning. They, too, have ignored it. A planning commission might, after all, provide some sort of check on the mayor’s and deputy mayor’s adventures in development.

The city will probably continue to function as it does today without a planning commission. Emergency repairs to failing infrastructure, expensive (mostly speculative) development schemes, an unplanned baseball stadium, and sporadic treatment of selected sites along New York Avenue have become the city’s modus operandi. Meanwhile, the city continues to tolerate the nuisance of an illegally operated trash-transfer facility on Brentwood Road, just opposite the Israel Baptist Church.

The city also has chosen to put aside the messy problem of Department of Motor Vehicle operations, many of which are now crowded into an obsolete, ill-paved shopping center beside the trash-transfer facility. DMV inspectors are reduced to authorizing illegal parking in the shopping center and to conducting their driving tests on overloaded public streets. It is noteworthy that the original testing facility was much larger and located across Brentwood Road, but was compressed and relocated to make room for new development on the Rhode Island Avenue/Brentwood Road site in Northeast.

It seems that “smart growth” now extends only to the low-hanging fruit of new condo and shopping center development, rather than the untidy business of planning for needed parks, recreation facilities, vehicle storage and maintenance and schools.

Mayor Fenty is to be applauded for his valiant effort to take over the embarrassing public school system, but the citizens are still holding their breath to see if he and his new chancellor succeed. In the meantime, many wonder what types of schools will serve whatever types of occupants there may be in the vast number of condominiums that have been built in various locations throughout the city.

Washington is, and will remain, a fragmented city. It is divided between the federal city, which is governed mainly by Congress and the securicrats, and the rest — which is about half — governed to a certain extent by the city government. The city’s budget, never a certainty, is still subject to approval by Congress. A planning commission would be of some help in assuring Congress that there is some relationship between the proposed budget and actual capital improvements, many of which are badly needed. The planning commission would bring a degree of professionalism to the process of government, and begin, at last, the long task of educating officials and the public all across the city about planning per se as a basic obligation of government. The present lineup at OP can’t, and won’t, do this.

When he first came to town from Oakland, Calif., to fill the post of city administrator, Robert Bobb inquired of a group of citizens, “Why doesn’t Washington have a planning commission — nearly every other big city has one?” By now he understands, I’m sure.

Dorn C. McGrath Jr. is professor emeritus at George Washington University. He is a fellow of the American Institute of Certified Planners.

No by Ellen McCarthy

Proponents tout a planning commission for Washington as a cure for all perceived planning ills. Indeed, such commissions are part of the planning process in many, though by no means all, large American cities. D.C., however, already has a high-functioning planning structure, so in order to justify change, we must be clear about what a planning commission can — and cannot — do for Washington.

Many of the arguments for the commission relate more to policy disagreements with the Office of Planning than to identifying holes in the present system that could be fixed by a volunteer planning advisory group.

The District already has a good system of planning checks and balances. The Home Rule Charter designates the mayor as chief planner; the mayor has delegated that power to the Office of Planning, which currently has more than 70 staff positions. OP prepares plans for neighborhoods, maintains a state-of-the art geographic information system and Census data, does long-range planning and prepares a report on every case that goes before the Zoning Commission or Board of Zoning Adjustment.

The charter provides for a Zoning Commission that adopts amendments to zoning regulations, changes to the existing zoning classifications and new overlay districts and also reviews campus plans and proposed planned unit developments. D.C. is unlike most jurisdictions in that its Zoning Commission’s decisions do not go before the council for a vote. They are final, except for appeals to the courts. The Board of Zoning Adjustment grants variances or special exceptions when circumstances make it difficult to abide by the zoning regs.

The touchstone of the entire system is the comprehensive plan, which is prepared by OP, proposed by the mayor, adopted by the Council, and reviewed by National Capital Planning Commission and Congress. In addition to policy goals covering transportation, economic development, urban design, etc., the comp plan includes a map specifying land use and intensity for every parcel in the District. Legally, zoning “may not be inconsistent” with the plan.

One of the major benefits of planning commissions in some cities is to provide objective input on development proposals, frequently as a counterpoint to elected bodies subject to pressure from campaign contributors or small but vocal groups of neighbors. In our case, the Zoning Commission plays this role, largely insulated from political pressures, but still accountable. The mayoral appointees serve specified terms, and can be blocked by the mayor or the Council. The federal representatives are ex officio, and are not beholden to campaign contributors or NIMBYs.

The only major areas left out of ZC review are the comp plan and small neighborhood plans. After extensive public input, these go directly to the Council for review and adoption. Although the Council holds public hearings on these, some planning commission advocates consider this to be insufficient opportunity for public input. It’s a hard argument to make — on the comp plan, for example, there were a Citizen Advisory Commission, three multihour public hearings, two Council votes, dozens of meetings with citizens and local Advisory Neighborhood Commissions and a Web site that received more than 2 million hits.

Some advocates of a planning commission even envision it making recommendations to the Zoning Commission on individual projects. Adding yet another review level to a project that may already be undergoing review by the local Advisory Neighborhood Commission, the neighborhood association, the Office of Planning, the Historic Preservation Review Board and the Zoning Commission or BZA would not serve to encourage investment in our neighborhoods.

Finding qualified members would also be difficult. The number most often suggested is nine. Those members would need some expertise in planning issues and would have to be broadly representative of the city. As it is, there is difficulty in getting the right appointees for the ZC, BZA and HPRB.

And if the planning commission’s staff were to number more than a handful, there would be the possibility of competing planning agencies, creating an unnecessary expense and replicating existing capabilities.

The District is blessed with a professional planning staff and a system of checks and balances. A planning commission might provide for additional public input and objective recommendations to the Council for small-area plans and the comprehensive plan — if sufficient qualified people could be persuaded to serve and if the scope and staffing were carefully managed to avoid unproductive bureaucratic in-fighting. And those are big ifs.

Ellen McCarthy is director of planning and land use in the real estate section at Nixon Peabody. McCarthy served as director of the Office of Planning under then-Mayor Tony Williams.

Free Your Data

While new websites have done a terrific job allowing people to share text, photos, and videos, one form of data that has thus far resisted the trend towards new collaborative tools is raw data. Even the best websites generally isolate data as downloadable spreadsheets, leaving it to the individual users to analyze the results and create graphs and charts.

My friend Josh tipped me off to a new website called Swivel who hopes to change that. On their website, anyone can join and easily upload data, create graphs and tables, and even compare variables between datasets. The service is free if you make your data freely available, and is planning to charge for private accounts.

I’ve uploaded a few datasets I had lying around. Did you know the amount of vacant housing is increasing in Baltimore?

After posting this data on homicide in the District:

I found another blogger who had posted data for New Orleans, and could easily combine the two on a new graph:

The site isn’t perfect. Because the website automatically creates graphs for the data you upload, the system is clogged with a slew of meaningless or misleading graphs. (I’d prefer graphs be created when users create them) Data visualization purists will no doubt chafe at the limited options and prevalence of bad graphs. However, I believe the system has potential as a easy-to-use clearinghouse for easily sharing data. As for concerns about quality, the founders have already lined up a an impressive list of “Official Sources” including the National Weather Service, World Health Organization, and U.S. Department of Transportation.

> Swivel

Understanding the 1960s ‘Civil Disorders’

In the summer of 1967, violence broke out in African American neighborhoods in 164 American cities, including major events in Buffalo, Cincinnati, Detroit, Milwaukee, Minneapolis, Newark, Plainfield (N.J.), and Tampa. In April 1968, after the assassination of Dr. Martin Luther King, Jr., violence was recorded in over 100 cities, including major events in Washington, D.C., Chicago, and Baltimore. Affected neighborhoods saw arson, looting, and clashes with law enforcement.

After the summer of 1967, which featured a week-long incident in Detroit which left 43 dead, President Lyndon Johnson appointed a presidential committee to study what had happened in American cities that summer. Headed by former Illinois Governor Otto Kerner, the committee published their report the following spring. The Kerner Commission Report is a 600-page result of of exhaustive research into the events and their causes. Unfortunately, too often all that is mentioned about the report is its most famous line, which declared that “Our nation is moving toward two societies, one black, one white—separate and unequal.” However it contains a richly detailed story and has much to tell us about that summer.

In commemoration of the 40th anniversary of the events of the late 1960s, both major Detroit newspapers have printed dozens of stories about the event this summer, analyzing the event and its relevance to Detroit today. Already discussions have started about historical studies and events to correspond to the 1968 event in Washington.

What do we know about these events, and what has been their impact?

First, there’s the issue of what to call them. Most sources refer to them as “riots,” or at times “race riots.” However, unlike in other “race riots” when various racial groups were quite literally fighting in the streets, the participants of these events were mostly (although not exclusively) African American, and the activities were not specifically directed at people of other racial groups. Furthermore, the word “riot” itself seems inadequate. Meaning “a violent public disorder,” the word strips the events of any historical or political significance. This seems unsatisfactory — after all, the 1968 events occurred immediately in response to Dr. King’s death, and as we will see the community’s stated grievances were painfully valid.

Others suggest a better term might be “police riot.” While police behavior certainly played a major role in instigating and worsening the riot, as well as contributing to a large degree to the violence (particularly in Detroit), this term also seems too limiting to fully describe the events.

Finally, there are those who prefer the term “rebellion.” This term seems to come closest, meaning “opposition to one in authority or dominance.” After all, the violence of the riot was often directed towards symbols of political or economic authority. However, I still find the term somewhat unsatisfactory. After all, in historical terms rebellions are often organized affairs with leaders and some amount of strategy. The Kerner Commission specifically found no organization or conspiracy. The commission itself adopted the neutral-sounding term “Civil Disorder.”

Despite the occasionally apocalyptic scale of “the riots” in popular memory, the events in most cities were limited. The Kerner commission report itself reports that while the events are highly significant, the extent of disorder has been “exaggerated,” concluding three-fourths would not be nationally-newsworthy in previous years. Even in cities where violence was the worst, looting was generally limited to specific streets, with sporadic events elsewhere. It generally took just a few days for authorities to regain control. In Detroit, the worst of 1967, control was restored in roughly 4 days.

The connection of the events to “white flight” has been exaggerated. Migration to the suburbs began in earnest in the late 1940s, continuing more or less smoothly to almost the present day. (Washington only stopped its population decline in the 2000s, and most other major cities’ population continued to decline up through the 2000 census). The trends in these graphs were well established before the late 1960s.

As historian Kevin Boyle pointed out in an op-ed in the Washington Post, the grievances that caused the riots are historically well documented:

In retrospect, Americans should have seen the riot coming. Since the 1920s, not just Detroit but all of the nation’s major cities had restricted blacks to the oldest, most decrepit neighborhoods available. Segregation inevitably spawned discrimination: Schools in African American areas were overcrowded and underfunded; city services were delivered sporadically; policing was frighteningly oppressive.

Then, in the 1950s and 1960s, the urban black economy tumbled into crisis, as decent-paying factory work started to disappear. From 1947 to 1967, Detroit alone lost 120,000 manufacturing jobs. In the city’s ghetto, unemployment skyrocketed. Poverty intensified. And under the strain of it all, life on the streets became more dangerous. There were 112 murders in Detroit in 1946. In 1966, there were twice as many, a sure sign of a horribly strained social fabric.

Tom Sugrue ends his excellent Origins of the Urban Crisis on the eve of the rebellion there, underscoring its role as merely a small capstone to long-building historical forces of injustice at work in that city. In their quest to determine causes, the Kerner Commission conducted a public opinion survey in 15 cities and conducted over 1200 interviews. They reported finding similar major grievances in almost every city, and organized them into categories. The top three: police practices, unemployment and underemployment, and inadequate housing.

The others were inadequate education, poor recreational facilities and programs, political unresponsiveness, white racism, discrimination in the administration of justice, inadequacy of federal programs, inadequacy of municipal services, discriminatory consumer and credit practices, and inadequate welfare programs. The report also points out that in the cities surveyed, none had ever had a black mayor, only three had more than one black legislator, and in only 4 did blacks hold any important municipal positions.

The immediate impact of the events had to do with commercial businesses and real estate. Most of the streets impacted saw businesses close and buildings lost due to immediate damage or subsequent disinvestment and neglect. In Washington in particular, the event accelerated the existing trend of the shift of retail to auto-oriented shopping centers and the death of specialized independent shops along crowded retail corridors. The damage from the event and the urban redevelopment responses has had a profound and lasting impact on the city’s geography. As a result, the Metro’s Green Line was re-routed, urban renewal schemes created the vacant land that was to be used later for the convention center, and the riot-damaged corridors absorbed large numbers of subsidized public housing buildings. Some affected corridors suffered less than others, and I imagine each neighborhood which saw violence in the late 1960s has a slightly different story.

Without excusing the actions of individuals, we must be able to critically examine the causes of the events of the late 1960s if we ever hope to prevent their re-occurrence. The sad persistence of similar events in our cities in the years since only underscores this need.

> W. Post: Kevin Boyle op-ed “The Fire Last Time”
> Wikipedia: Lists of incidents of civil unrest in the United States
> Detroit News Special Report: Panic in Detroit
> Detroit Free Press: Lessons From the ’67 Riot
> Freedom Road: “Burn, Baby, Burn”
> Rutgers U.: 1967 Newark and Detroit Riots Website

The first photo is of Chicago from April 6, 1968, posted by Flickr user Andros47, the second of Washington, D.C., also from April 1968, was posted by Richard Layman.

My July Planetizen Post

This month I survey the career of greek planner Constantinos Doxiadis, and ask: “Where Are the Star Planners?

Rapid Bus Service Starts on Georgia Avenue

Today marks the end of the second week of service of WMATA’s new Metro Extra line on Georgia Avenue. To my knowledge the project is the second Bus Rapid Transit line developed in the region, and the first express bus to operate almost exclusively inside the District.

The service, officially Metro Extra Route 79, currently operates every ten minutes from 6-9:30 a.m. and 3-6:30 p.m. along 7th Street and Georgia Avenue, with stops at the Navy Memorial, Chinatown, Shaw, Petworth, Walter Reed, and Silver Spring, among others. When Dr. Gridlock took a ride on the bus recently he found it running smoothly, with the exception of a few confused riders. Over the next year new bus shelters, sidewalk bulb-outs, and technology to speed buses through intersections will be tested and installed. The service may also be eventually be extended to provide all-day service.

Although the branding for the route is less than ideal (extra what?), the marketing has been more creative than I’ve seen for any other WMATA bus service. I even received a pamphlet in the mail in Spanish and English clearly explaining the route, and containing coupons to use at the AFI Silver Theater and Borders Books (both located near route stops), and two coupons to ride the bus free during its first week of operation. With Arlington County, WMATA developed the successful PikeRide to provide service on Columbia Pike in Virginia. However, other suburban express routes could be improved by clearer marketing and route information.

The service, a joint project between WMATA and the District Department of Transportation (DDOT) shows that DDOT continues to be much more dedicated to enhancing transportation in the District, having also launched the successful DC Circulator service, which recently expanded to take over the Georgetown Blue Bus route on Wisconsin Avenue.

The project is a rare bright spot for WMATA’s bus system, where little major changes have been made since a 2005 evaluation in which experts reported the system was providing erratic service on aging buses along routes that have changed little since 1973. High hopes are riding on WMATA’s much-discussed new General Manager, John Catoe, Jr., who successfully led the overhaul of bus service in the sprawling Los Angeles system.

> WMATA Metro Extra Information
> Metro Extra Project Development Website
> W. Post: “Georgia Avenue to Get Express Bus Route“, Get There Blog: “New Metrobus Rolls Out”
> W. Post, 12/27/05: “Progress Has Passed Metrobus By”
> DCist, 11/17/06: “New Guy on the Bus” (Catoe profile)