Daily Digest - February 19: The Misleading Math on the Minimum Wage

Feb 19, 2014Rachel Goldfarb

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In Its Minimum-Wage Report, the CBO Places Its Thumb on the Scale (TNR)

The new report, which predicts a $10.10 minimum wage could cost as many as 1 million jobs, overstates the potential downside and understates the benefits, argues Roosevelt Institute Fellow Mike Konczal.

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In Its Minimum-Wage Report, the CBO Places Its Thumb on the Scale (TNR)

The new report, which predicts a $10.10 minimum wage could cost as many as 1 million jobs, overstates the potential downside and understates the benefits, argues Roosevelt Institute Fellow Mike Konczal.

Student Debt May Hurt Housing Recovery by Hampering First-Time Buyers (WaPo)

Dina ElBoghdady reports that new rules could be keeping young would-be homeowners with student loans out of the market, and that has implications for the housing market and the broader economy.

Businesses Are Swimming in Money: Profit Protection Will Not Help With Economic Recovery (Pacific Standard)

Martin Hart-Landsberg uses charts to demonstrate just how much money businesses are sitting on today. He says this data shows that pro-business policy won't speed up the recovery for everyone else.

New on Next New Deal

In VW Vote, Republicans Fight the Really Radical Idea that Workers Should Have a Voice in Business

Roosevelt Institute Senior Fellow Richard Kirsch explains how the GOP influenced the United Auto Workers' loss at Volkswagen's Chattanooga plant, even though the company wasn't opposed to the union.

Finding Affordable Housing Solutions in Boston

Gavin O'Brien, a member of the Greater Boston chapter of Roosevelt Institute | Pipeline, lays out possible policy solutions to the soaring cost of living in Boston, from cooperative arrangements to affordable housing trusts.

Snowed Under: When Keeping Schools Open Puts Low-Income Students Further Behind

Attendance data doesn't support the claim that NYC schools needed to stay open during last week's snowstorm so kids could eat, says Sarah Pfeifer Vandekerckhove, the Roosevelt Institute's Director of Programmatic Operations.

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Finding Affordable Housing Solutions in Boston

Feb 18, 2014Gavin O Brien

Innovative solutions are needed to solve the serious problem of housing affordability in the Boston area.

Innovative solutions are needed to solve the serious problem of housing affordability in the Boston area.

The housing affordability crisis is reaching dramatic levels in Massachusetts. Case in point: according to The Boston Foundation’s Greater Boston Housing Report Card, “during the last eight years, the cost of living in Greater Boston has increased twice as fast as the median household income of homeowners and three times faster than the median household income of renters.” Affordability is a problem for 40 percent of homeowners in the area. For many families, owning a home is not even an option. The U.S. Census ranks Massachusetts 44th in homeownership and also 44th in income equality. These two rankings are not coincidental.

Homeownership increases social mobility and acts as a buffer against falling into poverty. For example, as an inheritance, a home can improve the economic outlook for future generations. Homes also have strong symbolic value as a key component of the American Dream. For these reasons, increasing access to homeownership is an important tool in the fight against inequality in America. Federal policies like the home mortgage interest deduction provide large financial incentives for homeownership. Other incentives and assistance may be needed.

Comprehensive efforts to maintain and increase the availability of affordable housing must involve all levels of government, in addition to nonprofits like local community development corporations. The private housing market will continue to drive up prices, so there is a need for creative solutions that avoid or reduce normal market pressures.

For example, cohousing or cooperative arrangements can allow for cost sharing and rent moderation. In a limited equity cooperative, members buy shares of a corporation that owns the housing. The corporation makes decisions democratically, can pay for building improvements, and removes the profit motive from property ownership. The value of a share is limited. There is, however, need for more bank financing of housing cooperatives, which could be addressed through state regulations or the use of community development financial institutions (CDFIs) – locally-based financial institutions targeting underserved populations.

Another possible solution is affordable housing trust funds operated at the city level, which are financed through property taxes, government funds, or fees levied on building developers. The trust funds can subsidize construction of new housing and provide direct subsidies to homeowners. The city of Somerville near Boston operates such a fund that loans money for down payments to first-time homebuyers and renters.

Affordable housing solutions must also involve local colleges and universities. Greater Boston has a large student population. Graduate students in particular are increasing in number, which drives up the cost of housing for student and non-student residents alike. City government could work with colleges to construct additional low-cost student housing to alleviate some of this upward price pressure.

High housing prices affect the ability of young professionals and families to remain in the Boston area. This in turn reduces the city’s economic and social potential.  Pipeline Greater Boston is organizing a series of discussions to examine possible solutions to housing issues that affect these groups. There is a need for civically engaged young people in Boston to implement new policy ideas and address the housing crisis that is affecting them, their neighborhoods, and the city as a whole.

Gavin O'Brien is a recent graduate of Brandeis University's Master of Public Policy program and a core member of the Greater Boston City Network of Roosevelt Institute | Pipeline.

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Daily Digest - February 11: Raising Wages from Coast to Coast

Feb 11, 2014Rachel Goldfarb

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The Minimum Wage Fight: From San Francisco to de Blasio’s New York (Reuters)

Mayor de Blasio and others should learn from San Francisco's example when it comes to lifting standards for low-wage workers, write Ken Jacobs and Michael Reich.

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The Minimum Wage Fight: From San Francisco to de Blasio’s New York (Reuters)

Mayor de Blasio and others should learn from San Francisco's example when it comes to lifting standards for low-wage workers, write Ken Jacobs and Michael Reich.

Horrible Bosses (TAP)

Paul Waldman writes that some employers are blaming the President and his health care policies for benefit cuts and stagnant wages. But workers should know: their bosses are lying.

Labor Battle at Kellogg Plant in Memphis Drags On (NYT)

As the lockout approaches four months, Steven Greenhouse says these workers are determined not to accept a contract that could replace them all with "casuals," or lower-paid temps.

New York AG To Put Heat On Banks for Foreclosed Properties (WSJ)

Eric Schneiderman wants to require banks to take better care of so-called "zombie properties" they've foreclosed on, reports Andrew R. Johnson, and his proposed bill would reduce neighborhood blight.

Obama's Partly to Blame for the Postal Service's Backward Ways (TNR)

Progressive reform, including postal banking, is in reach for the USPS, says David Dayen, if only the president would step up and fill the five empty seats on its Board of Governors.

Support the Student Loan Borrower Bill of Rights (Blog of the Century)

Jill Silos-Rooney says Senator Warren's proposal bets that college grads who have fewer struggles with debt will be better for the economy than government profits on student loans.

House GOP Rolls Dice on Debt Limit (Politico)

Jake Sherman and Ginger Gibson report on the GOP's plan to pass a debt ceiling increase by tying it to fixing military benefit cuts. That probably won't sway Democrats from a clean bill.

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Daily Digest - December 10: A Reminder That Policy Affects Human Lives

Dec 10, 2013Rachel Goldfarb

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Invisible Child (NYT)

Andrea Elliot reports in great depth on the life of a homeless girl in Fort Greene, Brooklyn. By placing this story in context with Mayor Bloomberg's housing and homelessness policies, she makes the effects of bad policy on human lives crystal clear.

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Invisible Child (NYT)

Andrea Elliot reports in great depth on the life of a homeless girl in Fort Greene, Brooklyn. By placing this story in context with Mayor Bloomberg's housing and homelessness policies, she makes the effects of bad policy on human lives crystal clear.

Study: U.S. Poverty Rate Decreased Over Past Half-Century Thanks to Safety-Net Programs (WaPo)

Zachary Goldfarb reports on a new study from Columbia University, which contradicts the official poverty rate significantly. The researchers traced back poverty using newer standards, and found that the safety net is particularly effective at protecting kids from poverty.

How Inequality Became as American as Apple Pie (The Nation)

Jessica Weisberg compares the concepts of inequality and mobility, ways to discuss poverty that appeal to opposite ends of the political spectrum. The right may prefer to talk about mobility, but social mobility in the U.S. is pretty terrible, which maintains inequality.

Let's Get This Straight: AIG Execs Got Bailout Bonuses, but Pensioners Get Cuts (The Guardian)

Dean Baker asks why the White House had to maintain AIG's contractual obligations during the bailout, even when it meant paying bonuses in March 2009, but Chicago can ignore its contracts to pensioners today.

Robbing Illinois's Public Employees (TAP)

David Dayen explains how pension theft has become a new norm. Public employees can no longer count on ever seeing the pension funds they negotiate for today, and the current retirees are in an even worse place, because many don't receive Social Security.

Tea Party Representative Supports Wasteful Government Program, Because YOHO (NY Mag)

Jonathan Chait says there's one clear tie among the government programs supported by Republican obstructionists: private profits. When sugar subsidies are "accepted norms," as Rep. Yoho (R-FL) said, it must be better to cut SNAP or Medicaid.

More Than Three-Quarters of Workers Missing from the Labor Force Are Under Age 55 (Working Economics)

Heidi Shierholz looks at a breakdown of "missing workers" (those who are neither employed nor looking for work) by age. Only a quarter of the missing workers could be early retirees, and the other 4.3 million will probably reenter the job market when it picks up.

New on Next New Deal

Think Global, Act Hyper-Local: Campus Network Rates Colleges on Economic and Social Impact in Their Communities

Roosevelt Institute Associate Director of Networked Initiatives Alan Smith explains a new Roosevelt Institute | Campus Network initiative, in which students will help their schools find ways to improve how they affect local communities.

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Daily Digest - November 7: Remember The Last Time Wall Street Invested in Housing?

Nov 7, 2013Rachel Goldfarb

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The Best City for the Next Generation of Artists Just Might Be Jackson (Atlantic Cities)

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The Best City for the Next Generation of Artists Just Might Be Jackson (Atlantic Cities)

Roosevelt Institute | Pipeline Fellow Nona Willis Aronowitz continues her series on cities where Millennials can succeed. She reports on the art scene in Jackson, MI, where young creatives are taking advantage of cheap available space to try new projects.

Wall Street Slumlords’ Outrageous New Scheme: How They Could Wreck the Economy Again (Salon)

David Dayen reports on Wall Street's newest housing-based investment vehicle, which are backed by rental payments. Ratings agencies have given these securities triple-A ratings, but mortgage-backed securities had the same rating.

The One Mortgage Fix Washington Isn’t Talking About (ProPublica)

Jesse Eisenger considers the pros and cons of keeping Fannie Mae and Freddie Mac in government, even though policymakers are ignoring that option. He thinks it might be the simplest and most effective choice - but it's the direct opposite of current policy trends.

A Booster Shot for Social Security (In These Times)

Sarah Jaffe explains the plan some progressive Democrats are presenting to expand Social Security. They call chained CPI a tax on life itself for seniors, because it assumes people will substitute cheaper goods when possible - but health care has no substitutes.

Ten States Have Banned Cities And Counties From Passing Paid Sick Days (ThinkProgress)

Bryce Covert looks at the states that passed preemptive laws banning municipalities from enacting paid sick leave. These states apparently know better than their cities, which may want to eliminate the lost productivity that comes with sick workers on the job.

Unemployment Benefits Set To Expire For 1.3 Million At End Of Year (HuffPo)

Arthur Delaney says that Congressional patterns of cutting close to the deadline for extending federal unemployment benefits should be cause for concern again this year. With Congress's disinterest in preventing SNAP cuts, he wonders if the same could happen here.

A Hunger Expert Explains What Happens Now That Food Stamps Are Cut (WaPo)

Dylan Matthews speaks to Joel Berg of the New York City Coalition Against Hunger about how SNAP cuts will affect food-insecure Americans, and how he would structure policy around hunger. Berg thinks that benefits weren't enough before the cuts.

New Student Loan Rules Add Protections for Borrowers (NYT)

Ann Carrns explains new rules from the Department of Education meant to helped borrowers get out of default. Income-based rehabilitative payments and increased ease in requesting forbearance should make a big difference for struggling graduates.

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Daily Digest - September 23: Fishing For Solutions to Underwater Mortgages

Sep 23, 2013Rachel Goldfarb

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Is Richmond’s Mortgage Seizure Scheme Even Legal? (WaPo)

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Is Richmond’s Mortgage Seizure Scheme Even Legal? (WaPo)

Roosevelt Institute Fellow Mike Konczal looks at the questions raised by Richmond, CA's proposal to use eminent domain to reduce underwater mortgage debt. He argues that the plan has plenty of legal precedent, and clear benefits for the residents of Richmond.

Mike Konczal on Economic Collapse, Hugh MacMillan on Fracking Study (CounterSpin)

Mike appears on FAIR's weekly radio show to discuss what has and hasn't changed in the five years since Lehman Brothers's bankruptcy. He argues that the crisis really started in 2007, with the first wave of foreclosures on subprime mortgages.

This Week in Poverty: New Data, Same Story (and Same Dangerous House Republicans) (The Nation)

Greg Kaufmann sees the latest Census data on poverty as proof that even though the needed steps in the fight against poverty are known, they aren't being implemented. Unfortunately, all the policies he wants to see are anathema to the GOP.

Jackie Speier Protests Food Stamp Cuts With Steak, Vodka, Caviar (HuffPo)

Robin Wilkey reports on Rep. Speier's speech calling out her peers who favor cutting SNAP for their excessive travel bills paid by the government. But caviar and filet must come before necessities for the poor, since the $40 billion in cuts passed.

American Bile (NYT)

Robert Reich argues that Americans are divided over many issues, but their anger comes from stagnant economic growth and widening inequality. The people who see the economy as rigged against them, whether by government or business, are the angriest.

  • Roosevelt Take: Roosevelt Institute | Pipeline and Roosevelt Institute | Campus Network will join Reich for a conference call on his new film "Inequality for All" on Wednesday.

It's the Austerity, Stupid: How We Were Sold an Economy-Killing Lie (MoJo)

Kevin Drum explains how the now-infamous Reinhart and Rogoff paper on debt as a killer of economic growth kicked off the austerity regime that has reduced U.S. economic growth by as much as two percent. It's been disproved, but we're still on the austerity train.

  • Roosevelt Take: Roosevelt Institute Fellow Mike Konczal was one of the first to look at the UMass paper that disproved the Reinhart-Rogoff paper.

The Shutdown Showdown: What Happens Now? (MSNBC)

Kasie Hunt looks at the likely timeline for the continuing resolution now moving into the Senate, which contains language defunding the Affordable Care Act. It's expected that Harry Reid will strip out that language before the Senate passes the bill.

The Most Important Lesson the Fed Taught the World This Week (The Atlantic)

Zachary Karabell argues that the Fed's announcement of no taper for now is a reminder that there is no certainty in markets. There's no excuse for businesses using "uncertainty" as a reason to not hire, especially when they then blame government dysfunction.

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Fifty Years After the March on Washington, Equality Remains a Dream

Aug 28, 2013Jim Carr

We've made progress on addressing many blatant injustices since 1963, but people of color still don't have an equal opportunity to succeed.

We've made progress on addressing many blatant injustices since 1963, but people of color still don't have an equal opportunity to succeed.

This week marks the 50th anniversary of the March on Washington. The Reverend Dr. Martin Luther King Jr.’s electrifying speech at that event was inspiring and unforgettable. Those remarks, combined with hundreds of thousands of people on the National Mall marching for jobs and freedom, seemed to electrify American society to its core. As President Bill Clinton recently remarked, “I remember thinking that, when it was over, my country would never be the same.”

Over the five decades since the March on Washington, much has changed. No longer do black students require National Guard escorts to enter the school of their choice. No longer are protesters for civil or human rights at risk of being beaten or attacked by dogs for exercising their constitutional right to challenge unfair or otherwise unwise laws.

No longer are jobs and opportunity blatantly denied on the basis of an individual’s race or ethnicity, gender, physical appearance, or sexual preference. No longer are America’s cities burning. And perhaps most significantly, no longer is the office of the President of the United States off-limits to an African American.

Yet in spite of these and many other successes that have been achieved over the past five decades, much of the forward momentum seems unsustainable, or old problems are replaced with new ones that continue to deny opportunities disproportionately to people of color.

Take, for example, the fact that our cities are no longer burning in protest to blatant acts of discrimination and denial of civil rights. While that’s true, the city of Detroit has never recovered from the tumultuous days of the 1960s. In fact, Detroit has continued to decay, literally, into bankruptcy. The city’s official unemployment rate was a staggering 16 percent in April 2013, with a black unemployment rate over 20 percent. And Detroit is not alone among cities with exceptionally high black unemployment rates.

The acceleration of the exodus of non-Hispanic white families from the nation’s inner cities, in part to avoid integration after passage of the major Civil Rights laws, combined with the relocation of manufacturing jobs first to the suburbs and later overseas, has created urban economic deserts that deny opportunities as powerfully as any segregationist policies.

National Guard troops no longer stand in front of school houses to block admission—they do not have to. Racial and ethnic residential segregation in many of the nation’s largest cities is so high that black and Latino students do not live within physical proximity of isolated non-Hispanic white suburban enclaves in sufficient numbers to achieve meaningful school integration.

Furthermore, the cost of college tuition is so high these days that no armed presence is needed to prevent young African Americans or Latinos from entering. The majority of African American and Latino students cannot afford access the nation’s major universities even where they meet the academic standards.

In fact, economic deprivation is so great among blacks and Latinos that race is used as a reliable proxy for exploitation by financial firms. Leading up to the recent collapse of the housing market, subprime lenders disproportionately targeted African American and Latino communities for their reckless and irresponsible high-cost loans. They generated huge profits while originating loans that were designed to fail.

The subsequent loss of homeownership among African Americans and Latinos has been the largest contributor to a staggering loss of wealth for African American and Latino households during the Great Recession. Latino and black households have lost two-thirds and more than half of their net wealth, respectively. The result is that today, the racial wealth gap between blacks and non-Hispanic whites, and Latinos and non-Hispanic whites, is greater than it was two decades ago.

Over the next decade, seven of ten new households will be headed by a person of color. In fact, already, the majority of babies born in America are of color. Yet the majority of their economic futures are not promising.

This dramatic shift in the composition of the nation’s population gives even greater impetus now than was the case a half century ago for America to become a more economically inclusive society. Today, economic equality is as much an issue of economic competitiveness and national security, for example, as it is social justice. After all, how can America maintain its economic and military leadership role in the world if the fastest growing segments of the population, i.e., people of color, remain economically marginalized?

In spite of the success we have achieved as a nation in breaking down the barriers to opportunities based on racial or ethnic bias, we remain far from Dr. King’s dream and vision of a just and equitable society.

Jim Carr is a Distinguished Scholar with The Opportunity Agenda and Senior Fellow with the Center for American Progress. He is also co-editor of Segregation: The Rising Costs for America.

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Daily Digest - August 16: Even Federal Jobs Aren't Always Good Jobs

Aug 16, 2013Rachel Goldfarb

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How President Obama Could Move Millions Into The Middle Class (Our Future)

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How President Obama Could Move Millions Into The Middle Class (Our Future)

Roosevelt Institute Senior Fellow Richard Kirsch presents a simple solution for shifting over two million workers into living wage jobs. By executive order, the President could require that workers on federal contracts get better wages and paid sick days.

The Light And Dark of Social Entrepreneurship (CSRwire)

Francesca Rheannon interviews Roosevelt Institute Fellow Georgia Levenson Keohane about the challenges of using private money for social needs. Georgia is concerned with scale, and whether a social mission can stay in the forefront as an enterprise grows.

ALEC Convention Met With Protests in Chicago (The Nation)

Micah Uetricht reports on protests against the ALEC convention, organized by a coalition of labor, community, and environmental groups. They hope that the protesters will shine a brighter light on ALEC's far-right austerity agenda and influence on legislators.

New Conservative Plan: Repeal Obamacare or We'll Default on the National Debt (Slate)

Matt Yglesias looks at the various ways the GOP has created debt ceiling crises in recent years. He doesn't think there's much to worry about in the current threat, but won't dismiss the possibility of this debt ceiling crisis turning into something nasty.

Dems Defy Obama on Mortgage Protections (MoJo)

Erika Eichelberger critiques the thirteen Democrats who joined Republicans to cosponsor bills that would demolish new Consumer Financial Protection Bureau mortgage rules, but cannot explain why they want to allow sub-prime mortgages to continue.

Houston Rockets Pre-K to Top of the Priority List (TAP)

Abby Rapoport examines a new plan in Houston to expand early childhood education. Proponents are pushing a ballot initiative to increase property taxes by one hundredth of one percent to fund daycare teacher training and they're finding broad support.

The Many, Many Jobs That Won't Earn You Enough to Live in Your City (The Atlantic Cities)

Emily Badger thinks that many of these jobs are necessary for a city's function, including bank tellers, fire fighters, janitors, and school bus drivers. If these workers can't afford rent in their cities, who is going to do these jobs?

Why Are Walmart Stores Underperforming? Blame Their Terrible Wages. (The Daily Beast)

Daniel Gross questions why Walmart's same-store sales fell this quarter. He suggests that Walmart pays such low wages that their employees can't afford to shop there as much, and recent protests against Walmart and other low-wage employers can't help.

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Guest Post: O Canada and Its Housing Market

Aug 14, 2013David Min

Mike here. Over the weekend I wrote a post at Wonkblog, "In Defense of the 30 Year Mortgage." Many people have responded to this idea by bringing up the housing market of our neighbors in Canada. In order to keep this conversation running, I have a guest post by David Min, friend of the blog and a University of California, Irvine law professor. Take it away, David:

Does Canada prove the 30-year fixed-rate mortgage is of limited value? Here’s Matt Yglesias from last week:

If you cross the border into Canada it's not like people are living in yurts. It works fine. But since homebuyers have to carry a bit more interest rate risk, they seem to purchase slightly smaller houses. Alternatively if you imagine a jumbo loan scenario where the 30-year fixed rate mortgage lives but with systematically higher interest rates, you'd find that people would have to respond by purchasing slightly smaller houses. And it's not a coincidence that Americans live in the biggest houses in the world.

As I’ve outlined in the past, the dominant mortgage product in Canada is a five-year fixed-rate mortgage, amortized over 25 years, that essentially requires refinancing every five years. This product leaves borrowers open to two important types of mortgage-related risk.

First, there is the risk that interest rates will rise significantly between the time the loan is first originated and the time that it must be refinanced, causing a payment shock that the borrower may not be able to afford. Second, there is the risk that when the loan comes due, there may not be refinancing options available to the borrower, either because the property has declined in value so much that the loan does not meet loan-to-value requirements, or perhaps because banks have reduced their lending due to a credit contraction.

For what it’s worth, Canada has historically had a greater government involvement in its housing finance system, through a combination of government-backed mortgage securitization and mortgage insurance offered by the Canada Mortgage and Housing Corporation (an entity similar in many ways to Fannie and Freddie), as well as governmental reinsurance for all mortgage insurance, which in total accounts for some 70-80 percent of all Canadian home loans. So if you’re looking to Canada as a model of getting the government out of housing finance, look again (and don’t look to Europe, which also has very high levels of government guarantees for housing finance, as I explained recently in congressional testimony).

As to Matt’s broader point about Canadian mortgage finance, there is no question that we can have a housing finance system without the 30-year FRM that drives sufficient capital into housing to meet our needs (both for owner-occupied and rental housing), but that’s not the point of the debate over the 30-year FRM. The key difference between Canada’s five-year FRM and the American 30-year FRM is that the former leaves interest rate risk (and refinancing risk) with consumers, whereas the latter leaves rate risk (and prepayment risk) with financial institutions such as banks, pension funds, and insurance companies.

The key question is whether interest rate risk is better placed with households or with banks and investors. Those of us who favor the 30-year FRM argue that this risk should be placed with the latter, who are better equipped to handle this risk. The available evidence suggests that average mortgage borrowers do not attempt to predict what mortgage rates will be five years down the line. And even if they could do this, they lack access to the financial instruments that might allow them to hedge against this risk. Conversely, banks and MBS investors already spend quite a lot of resources trying to protect against interest rate volatility.  

Moreover, when households are unable to deal with interest rate risk, they are unable to make their mortgage payments. This creates a double whammy insofar as higher rate risk for borrowers means higher credit risk for banks and investors. Thus, from a systemic stability standpoint, it seems to make more sense to place rate risk with financial institutions rather than with consumers.

Neither the U.S. nor Canada has experienced significant interest rate increases since the early 1980s, so the difference between the five- and 30-year FRMs has largely been a theoretical debate since that time. But as Karl Case (the economist who helped create the eponymous Case-Shiller home price index) has noted, we have at least one important data point from that last episode of interest rate volatility that suggests the 30-year FRM is preferable from a financial stability standpoint.

Both Vancouver and California had housing booms in the late 1970s, and both of course went through the double-digit interest rate increases of the early 1980s, which led to U.S. mortgage rates settling at about 17-18 percent. Then, as now, the dominant mortgage in the U.S. was the 30-year FRM and the dominant mortgage in Canada was the five-year FRM. Vancouver and California experienced starkly different housing markets in response to this interest rate volatility. Because Canadian mortgages were designed to be refinanced every few years, Canadian borrowers faced enormous payment shocks (with mortgage payments doubling or tripling), which resulted in a huge housing bust, with Vancouver experiencing a 60 percent (!) home price decline in the early 1980s. Conversely, California experienced a few years of a stagnant housing market in which potential sellers simply held onto their existing mortgages, and prices never fell in nominal terms.

This limited historical data suggests that the U.S. 30-year FRM is a more systemically stable product than the shorter duration rollover loan that is popular in Canada. Within the United States, of course, there is ample evidence that the 30-year FRM performs far better than short-term rollover loans. During the Great Depression, the delinquency rates on short-term rollover loans reached 50 percent, as underwater borrowers were unable to find sources of refinancing (sound familiar?). More recently, adjustable-rate mortgages experienced delinquency rates that were two to three times higher than fixed-rate mortgages made to comparable borrowers, as both the Federal Housing Finance Agency and the Mortgage Bankers Association have found.

All of this evidence suggests that critics of the 30-year FRM need to be treading a little more carefully in trashing the benefits of this particular product.

Follow or contact the Rortybomb blog:

  

 

Mike here. Over the weekend I wrote a post at Wonkblog, "In Defense of the 30 Year Mortgage." Many people have responded to this idea by bringing up the housing market of our neighbors in Canada. In order to keep this conversation running, I have a guest post by David Min, friend of the blog and a University of California, Irvine law professor. Take it away, David:

Does Canada prove the 30-year fixed-rate mortgage is of limited value? Here’s Matt Yglesias from last week:

If you cross the border into Canada it's not like people are living in yurts. It works fine. But since homebuyers have to carry a bit more interest rate risk, they seem to purchase slightly smaller houses. Alternatively if you imagine a jumbo loan scenario where the 30-year fixed rate mortgage lives but with systematically higher interest rates, you'd find that people would have to respond by purchasing slightly smaller houses. And it's not a coincidence that Americans live in the biggest houses in the world.

As I’ve outlined in the past, the dominant mortgage product in Canada is a five-year fixed-rate mortgage, amortized over 25 years, that essentially requires refinancing every five years. This product leaves borrowers open to two important types of mortgage-related risk.

First, there is the risk that interest rates will rise significantly between the time the loan is first originated and the time that it must be refinanced, causing a payment shock that the borrower may not be able to afford. Second, there is the risk that when the loan comes due, there may not be refinancing options available to the borrower, either because the property has declined in value so much that the loan does not meet loan-to-value requirements, or perhaps because banks have reduced their lending due to a credit contraction.

For what it’s worth, Canada has historically had a greater government involvement in its housing finance system, through a combination of government-backed mortgage securitization and mortgage insurance offered by the Canada Mortgage and Housing Corporation (an entity similar in many ways to Fannie and Freddie), as well as governmental reinsurance for all mortgage insurance, which in total accounts for some 70-80 percent of all Canadian home loans. So if you’re looking to Canada as a model of getting the government out of housing finance, look again (and don’t look to Europe, which also has very high levels of government guarantees for housing finance, as I explained recently in congressional testimony).

As to Matt’s broader point about Canadian mortgage finance, there is no question that we can have a housing finance system without the 30-year FRM that drives sufficient capital into housing to meet our needs (both for owner-occupied and rental housing), but that’s not the point of the debate over the 30-year FRM. The key difference between Canada’s five-year FRM and the American 30-year FRM is that the former leaves interest rate risk (and refinancing risk) with consumers, whereas the latter leaves rate risk (and prepayment risk) with financial institutions such as banks, pension funds, and insurance companies.

The key question is whether interest rate risk is better placed with households or with banks and investors. Those of us who favor the 30-year FRM argue that this risk should be placed with the latter, who are better equipped to handle this risk. The available evidence suggests that average mortgage borrowers do not attempt to predict what mortgage rates will be five years down the line. And even if they could do this, they lack access to the financial instruments that might allow them to hedge against this risk. Conversely, banks and MBS investors already spend quite a lot of resources trying to protect against interest rate volatility.  

Moreover, when households are unable to deal with interest rate risk, they are unable to make their mortgage payments. This creates a double whammy insofar as higher rate risk for borrowers means higher credit risk for banks and investors. Thus, from a systemic stability standpoint, it seems to make more sense to place rate risk with financial institutions rather than with consumers.

Neither the U.S. nor Canada has experienced significant interest rate increases since the early 1980s, so the difference between the five- and 30-year FRMs has largely been a theoretical debate since that time. But as Karl Case (the economist who helped create the eponymous Case-Shiller home price index) has noted, we have at least one important data point from that last episode of interest rate volatility that suggests the 30-year FRM is preferable from a financial stability standpoint.

Both Vancouver and California had housing booms in the late 1970s, and both of course went through the double-digit interest rate increases of the early 1980s, which led to U.S. mortgage rates settling at about 17-18 percent. Then, as now, the dominant mortgage in the U.S. was the 30-year FRM and the dominant mortgage in Canada was the five-year FRM. Vancouver and California experienced starkly different housing markets in response to this interest rate volatility. Because Canadian mortgages were designed to be refinanced every few years, Canadian borrowers faced enormous payment shocks (with mortgage payments doubling or tripling), which resulted in a huge housing bust, with Vancouver experiencing a 60 percent (!) home price decline in the early 1980s. Conversely, California experienced a few years of a stagnant housing market in which potential sellers simply held onto their existing mortgages, and prices never fell in nominal terms.

This limited historical data suggests that the U.S. 30-year FRM is a more systemically stable product than the shorter duration rollover loan that is popular in Canada. Within the United States, of course, there is ample evidence that the 30-year FRM performs far better than short-term rollover loans. During the Great Depression, the delinquency rates on short-term rollover loans reached 50 percent, as underwater borrowers were unable to find sources of refinancing (sound familiar?). More recently, adjustable-rate mortgages experienced delinquency rates that were two to three times higher than fixed-rate mortgages made to comparable borrowers, as both the Federal Housing Finance Agency and the Mortgage Bankers Association have found.

All of this evidence suggests that critics of the 30-year FRM need to be treading a little more carefully in trashing the benefits of this particular product.

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Daily Digest - August 13: Fighting Poverty in the Land of Success

Aug 13, 2013Rachel Goldfarb

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The Offline Wage Wars of Silicon Valley (Next City)

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The Offline Wage Wars of Silicon Valley (Next City)

Roosevelt Institute | Pipeline Fellow Nona Willis Aronowitz writes on the fight to increase the minimum wage in San Jose, where poverty exists in sharp contrast to Silicon Valley successes. This piece was published on a pay-to-read platform, and I've linked to an excerpt.

Inequality is Hindering Economic Growth (Baltimore Sun)

Roosevelt Institute | Campus Network founder Nate Loewentheil and Jacob Hacker denounce the "Big Trade-Off" between equality and efficiency. Economic inequality prevents the growth our economy needs, so people and poverty must come before the deficit.

Why the Anger? (Robert Reich)

Robert Reich suggests that income inequality is causing the polarization of our political system. People have many good reasons to be angry, from falling wages to government bailouts, but he fears that anger is pitting Americans against the wrong targets.

Your Mortgage Documents are Fake! (Salon)

David Dayen reports on a newly unsealed lawsuit, which reveals that banks faked documents to establish ownership of mortgages when trying to foreclose. He questions whether banks should control mortgages when they can't track who owns which loan

Lobbyist Secretly Wrote House Dems' Letter Urging Weaker Investor Protections (MoJo)

Erika Eichelberger reports on a letter to the Department of Labor signed by 32 Democrats opposing new regulations on retirement advisors and written by a financial services lobbyist. These regulations are meant to protect the populations the signatories represent.

The Return of One of the GOP's Dumbest Ideas (TAP)

Paul Waldman finds it strange that when proponents of the balanced budget amendment explain why the deficit is so bad, they claim it's due to draconian budget cuts that will be needed one day. Apparently, that means we should make those cuts today instead.

Remember the JOBS Act? (U.S. News and World Report)

Pat Garofolo thinks that any bipartisan jobs plan should be carefully scrutinized, considering what we got last time. The JOBS Act, signed in April 2012, reduces reporting requirements, so we're seeing more fraud and shell companies, but no new jobs.

The Workers Defense Project, a Union in Spirit (NYT)

Steven Greenhouse looks at the successes of the Workers Defense Project, which is organizing workers outside the traditional union setting for basics like workers' compensation. Their model is seen as a potential future for organized labor.

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