Analyzing Mortgage Market Risks

Please note this automated transcription may contain errors.

2
00:00:40.890 --> 00:00:52.890
Richard Green: Good evening, everyone. Our guest tonight is amongst the most knowledgeable people I know about mortgages in terms of both breadth and depth Laurie Goodman.

3
00:00:53.460 --> 00:01:06.720
Richard Green: Laurie had a distinguished if not to say legendary career on Wall Street for number of years before she moved on to run the mortgage research project at the Urban Institute

4
00:01:07.650 --> 00:01:22.950
Richard Green: That group pitot a mortgage dashboard on a regular basis. That is one of the most useful sources of information. I know you have seen links to the dashboard in class so far this year. And so I'm Laurie. It's a great pleasure to have you with us today.

5
00:01:23.280 --> 00:01:25.830
Laurie Goodman: Thanks very much for inviting me. Pleasure to be here.

6
00:01:26.100 --> 00:01:27.270
Richard Green: So I'm

7
00:01:27.690 --> 00:01:40.680
Richard Green: As I important Laurie, I start by asking all our guests. Talk a little bit about their career and how they got to where they are at the moment. So Laurie, you're going to be no exception. Please tell us how you have arrived, where you are in life at the moment.

8
00:01:42.990 --> 00:01:43.290
Laurie Goodman: Well,

9
00:01:44.310 --> 00:01:50.070
Laurie Goodman: I got my PhD at Stanford, actually, and wasn't sure whether I wanted to teach or

10
00:01:51.930 --> 00:02:02.190
Laurie Goodman: Or or do something on the business side. So I dropped the academic job market happened earlier. I took a job on the app and as an academic and it just wasn't me.

11
00:02:02.550 --> 00:02:13.560
Laurie Goodman: One big difference between being an academic and being in private industry is that an academia, you spend a lot of time making sure everything is perfect and private industry you spend

12
00:02:13.950 --> 00:02:21.210
Laurie Goodman: You spend 90 if you can get 90% of your time 90% of the way there and 10% of the time. That's a really good trade off.

13
00:02:21.450 --> 00:02:27.870
Laurie Goodman: And I decided that being an academic wasn't for me. I moved first I moved to the Federal Reserve Bank of New York and I was there about

14
00:02:28.620 --> 00:02:44.940
Laurie Goodman: Four years and then I moved on to Wall Street basically first doing research on features and options and then from like 1989 on doing research on the mortgage market, and that was truly my passion, it was

15
00:02:45.810 --> 00:02:56.250
Laurie Goodman: It was really good. I went through a lot of very interesting cycles in the mortgage market and just sort of love the whole love researching mortgages on

16
00:02:57.060 --> 00:03:08.670
Laurie Goodman: Helping and helping investors, figure out what they were supposed to do with their money what represented the best relative value what policy was going to be, and have that influence the value of the mortgages. I know, and

17
00:03:09.660 --> 00:03:14.160
Laurie Goodman: Made a lot of impact wine through the great financial crisis and then sort of

18
00:03:14.760 --> 00:03:27.180
Laurie Goodman: Around 2012 2013 began to feel like, oh my God. What does someone do who's tools to work the kind of hours, you have to work on Wall Street, but too young to retire. So

19
00:03:27.810 --> 00:03:36.120
Laurie Goodman: My second career was moving to the Urban Institute to form the housing found the housing finance policy center which is essentially

20
00:03:36.870 --> 00:03:47.730
Laurie Goodman: dedicated to providing data driven analysis of public policy issues sort of during my time on Wall Street. I found that people just didn't have data to make good decisions and

21
00:03:48.120 --> 00:03:59.100
Laurie Goodman: The hope was that in founding this sector, we would be able to provide good data that underlie decisions. I mean, so everyone's entitled to their own opinion but they're not entitled to their own facts.

22
00:04:00.270 --> 00:04:04.470
Richard Green: So that's I use that quote about 90 minutes ago. So, you know,

23
00:04:04.650 --> 00:04:07.650
Richard Green: Keynes keeps coming back at us over and over and over again.

24
00:04:08.130 --> 00:04:14.250
Richard Green: I can. It is a couple sidebar, but I was reading a paper on the returns to real estate.

25
00:04:15.690 --> 00:04:31.410
Richard Green: For investments at four colleges in Oxbridge going back to 1900 and Keynes ran investment for King's College from 1925 to 1946 which is when he died and

26
00:04:31.980 --> 00:04:42.360
Richard Green: The finding of the paper is that real estate returned to those colleges were actually quite disappointing. The interesting thing about canes. The reduced kings calling was a real estate as a

27
00:04:43.080 --> 00:04:51.600
Richard Green: Share of the portfolio by about two thirds over the time of his management there. So he knew what he was doing. And it's kind of remarkable

28
00:04:53.160 --> 00:05:03.150
Richard Green: So Laurie. I was going to move on to talking about the housing finance policy center and I'm going to get them to say, but you said doesn't get really intrigued me, which is about finding value.

29
00:05:03.750 --> 00:05:20.610
Richard Green: In mortgages and that's a lot about what this class is all about. So I want to back up a little bit to your previous career and ask you, how would you go about doing that, how would you determine when it was a good time to buy a mortgage backed security and when you want to get out.

30
00:05:21.840 --> 00:05:22.500
Laurie Goodman: Um,

31
00:05:23.880 --> 00:05:34.590
Laurie Goodman: So yeah, basically a combination of sort of looking at his store as where we were historically and then also looking at what could happen going forward.

32
00:05:35.070 --> 00:05:42.420
Laurie Goodman: And, you know, generally the time that everyone was most in love with any given asset class was sort of generally the worst time to buy

33
00:05:42.810 --> 00:05:51.120
Laurie Goodman: Because people were sort of are piling in its peak and sort of taking under loved asset classes and trying to figure out if there was something really

34
00:05:51.660 --> 00:06:05.760
Laurie Goodman: Bad about whether there's something inherently bad about them, or whether they were just unloved because they had just gotten really really hammered. So I don't know if a couple of specific examples would be

35
00:06:07.080 --> 00:06:08.130
Useful to us.

36
00:06:09.390 --> 00:06:29.400
Laurie Goodman: But you know, I started. Remember, you know, after the 2008 financial crisis, you know, as badly as bad as Fannie and Freddie securities before private label securities did an order of magnitude worse. I mean, nobody would buy these securities.

37
00:06:30.690 --> 00:06:39.270
Laurie Goodman: And the way they started structuring the securities changed the structure and pricing speed change. So one of the complaints about the securities is. Oh, um,

38
00:06:40.290 --> 00:06:46.980
Laurie Goodman: I just have too much extension risk on the securities. So even if they're even if you tell me their credit, good, which I'm not sure I believe

39
00:06:47.310 --> 00:06:51.150
Laurie Goodman: I'm really worried about the credit risk component. Well we you know we went back and we

40
00:06:51.780 --> 00:07:06.390
Laurie Goodman: Then by because the securities were structured differently. The extension risk was just much much less. And so we were able to show that to some investors and it turned out to be the home or one of the home run trades, you know, so

41
00:07:08.580 --> 00:07:16.350
Richard Green: Specifically about why the extension risk. What it was what it was about the structure that may extension risk less of a problem.

42
00:07:16.530 --> 00:07:22.950
Laurie Goodman: So basically they slowed down the price speed. So I, you know, sort of at the peak just prior to the

43
00:07:24.510 --> 00:07:41.610
Laurie Goodman: Financial crisis. Some of these non agency jumbo securities were priced at pricing speeds at like 525 or just 525 psi just really, really fast. So if you go from from 525 and then you slow it down to 200 it's

44
00:07:42.030 --> 00:07:53.490
Laurie Goodman: Tremendous extension risk. Whereas if you start pricing it to 15 you slow it down to 200 that's much less of an effect. So the extension risk was just an order of magnitude lower which basically meant that the

45
00:07:54.570 --> 00:08:01.140
Laurie Goodman: Shorter classes were just a lot smaller as well. So you were better protected in all respects.

46
00:08:02.220 --> 00:08:09.180
Laurie Goodman: And actually, interestingly enough, sort of in the wake of covert 19 sort of a similar thing happened. Um,

47
00:08:09.630 --> 00:08:20.970
Laurie Goodman: Although it wasn't, it wasn't the pricing speeds people became so concerned about the when the Fed intervened and basically you know propped up the agency market.

48
00:08:21.390 --> 00:08:26.220
Laurie Goodman: Nobody propped up the non agency market. Meanwhile, some of the

49
00:08:26.790 --> 00:08:33.060
Laurie Goodman: mortgage rate to have a lot of non agency loans and a lot of not agency securities.

50
00:08:33.270 --> 00:08:40.770
Laurie Goodman: Were were for sellers because they were leveraged entities and the values of the securities went down, which meant they had to sell to keep up with their margin calls

51
00:08:40.950 --> 00:08:50.250
Laurie Goodman: Which meant the prices went down more because nobody was buying because no one had any excess funds and so it was just a purely liquidity crisis and the values of the non agency.

52
00:08:50.850 --> 00:08:59.340
Laurie Goodman: Securities and loans just absolutely plummeted, sort of, I think the worst pricing was sort of late April.

53
00:08:59.970 --> 00:09:06.090
Laurie Goodman: Late March, early April, and then, you know, and then sort of the for sellers were gone, or

54
00:09:06.570 --> 00:09:18.600
Laurie Goodman: Sort of recovered and we see forbearance. And at that point, prices began to improve. And in fact, improved dramatically since then. But if you've looked at this sort of asset class and said oh my god it's bad. Nobody wants to buy it.

55
00:09:19.050 --> 00:09:25.590
Laurie Goodman: You would have missed just a fabulous opportunity to purchase it, assuming that you have the funds to do so because

56
00:09:26.190 --> 00:09:36.000
Laurie Goodman: People were so you know the prices just plummeted to the extent that you could assume really really worst case scenarios in terms of how many borrowers. We're going to default on

57
00:09:36.330 --> 00:09:44.700
Laurie Goodman: Legacy or how bad forbearance was going to get on new securities and not break these securities and still end up with a very healthy return

58
00:09:47.430 --> 00:09:56.370
Richard Green: To our friend Chris Mayer about mortgage rates and how you know the value of them just collapsed and it didn't make sense to me because

59
00:09:58.020 --> 00:10:11.340
Richard Green: If you look at how the private label stuff has been underwritten over the last 10 years it's been so tightly underwritten it's just hard to see a lot of danger there and the legacy stuff was all originated at

60
00:10:12.360 --> 00:10:21.810
Richard Green: At most recently 13 years ago, which means any problems that that would have had would have been long gone. So I thought that was really a mystery to me.

61
00:10:21.840 --> 00:10:25.470
Laurie Goodman: And and so that's why you aren't managing a portfolio. No.

62
00:10:28.980 --> 00:10:30.960
Laurie Goodman: Amount of rationality into the market.

63
00:10:31.260 --> 00:10:33.210
Richard Green: Yeah yeah so

64
00:10:34.530 --> 00:10:41.520
Richard Green: That's really interesting. So, but that's it. But those sort of opportunities are exactly i think what students want to hear about that. I tell them about

65
00:10:41.850 --> 00:10:53.370
Richard Green: Scott Simon's PIMCO trade where he's decided to go very long and Fannie and Freddie securities in 2008 on the grounds that it was very unlikely government was gonna let them fail.

66
00:10:53.940 --> 00:11:00.690
Richard Green: And at the same time the prepayment there the extension was good. There was no credit risk to the prepayment slowed down a lot.

67
00:11:01.260 --> 00:11:13.560
Richard Green: Until you know harp came along, which will, we're going to talk about a little later. And so you have these all these mortgages trading at a premium that weren't going to default. And so that was a really good opportunity at the time.

68
00:11:14.760 --> 00:11:25.470
Richard Green: But let me let me come back now to your what you're up to now, which is the housing finance policy center. So just tell us a little bit of what's it about what will, and you talk to her broadly.

69
00:11:25.890 --> 00:11:39.450
Richard Green: About the ideas to provide good data to people making decisions about mortgages. Um, but I think that doesn't do justice to it took a little bit about the sort of projects that you have been working on to been running sector.

70
00:11:39.930 --> 00:11:55.290
Laurie Goodman: So I think our, you know, our biggest focus has actually been credit availability. The credit box got very, very tight in the aftermath of the great financial crisis that is, it was very hard for borrowers who didn't have pristine credit to get a mortgage

71
00:11:56.700 --> 00:12:06.360
Laurie Goodman: And people started talking about, oh, we only want to make sustainable mortgages. We only want to make good mortgages. Well, if you can tell me what a good mortgages. You're a better person than I

72
00:12:06.780 --> 00:12:16.350
Laurie Goodman: It seems like every mortgage has some probability of default. There are very few mortgages, where they're very few borrow never default. They're very few borrowers that we're all that will always default

73
00:12:16.620 --> 00:12:22.500
Laurie Goodman: It's not about making sustainable mortgages about figuring out what probability of default you're prepared to tolerate

74
00:12:22.920 --> 00:12:31.260
Laurie Goodman: And, you know, so the credit box tight into the fact that we're to the point where we're prepared to tolerate it fairly low probability of default, it's been sort of slowly.

75
00:12:31.890 --> 00:12:49.380
Laurie Goodman: You know, expanding until cove at 19. At which point, it's tight considerably. But, you know, sort of nothing but still, you're still at the peak, you're still and you know for early 2020 you are taking less than half the credit risk you're taking and sort of

76
00:12:51.270 --> 00:12:54.090
Laurie Goodman: A period of what I would consider normal friends standards.

77
00:12:55.320 --> 00:12:55.950
Richard Green: So that's

78
00:12:55.980 --> 00:13:10.830
Richard Green: That gets into your million missing mortgages, which is a very nice catchy way to put things. Tell us a little bit about how you went about finding if that's the right word those million missing mortgages and the implications of that.

79
00:13:12.870 --> 00:13:19.050
Laurie Goodman: Yeah, so we actually did that work, a while ago and it was sort of a pain. But we went back and did said okay

80
00:13:19.590 --> 00:13:20.910
Richard Green: The best work is a pain.

81
00:13:21.270 --> 00:13:21.780
Yes.

82
00:13:22.800 --> 00:13:25.500
Laurie Goodman: But you've got more patience for it than I do.

83
00:13:28.500 --> 00:13:30.030
Laurie Goodman: My short academic career.

84
00:13:32.010 --> 00:13:41.490
Laurie Goodman: But basically what we did is we went back to a time when we did is we looked at sort of what the credit box look like in terms of

85
00:13:42.750 --> 00:13:46.740
Laurie Goodman: loan to value ratios and psycho scores.

86
00:13:48.960 --> 00:14:03.570
Laurie Goodman: During sort during short periods where we are during a period where we thought credit was sort of normal and then we looked at what it is, what it was at any given point in time. So I think we first did this analysis in 2014 when credit was like nearly at its Titus level.

87
00:14:03.930 --> 00:14:14.190
Laurie Goodman: And we, we said, okay, so how many mortgages, what percentage of mortgages were in this category. This category. This category we assume the top category, basically all the mortgages to hi fi go

88
00:14:15.150 --> 00:14:20.250
Laurie Goodman: Low LTV borrowers. We're getting made naturally we did it primarily by Psycho and then

89
00:14:20.700 --> 00:14:29.730
Laurie Goodman: Whereas, by the time you got to the bottom category. They were much older portion were made. So we said, Okay, let's say the top category was constant all those mortgages are being made.

90
00:14:29.970 --> 00:14:45.570
Laurie Goodman: If we were to go back to the credit condition. If we were to go back to earlier credit conditions, how many loans are missing from the intermediate and bottom categories in terms of psycho scores. Then we made some other adjustments, but that was basically what we did.

91
00:14:46.560 --> 00:14:50.040
Richard Green: So the other way. The other way you characterize this as you talk about

92
00:14:51.120 --> 00:14:55.860
Richard Green: A product risk and borrower risk and you you you do a

93
00:14:57.300 --> 00:14:58.080
Richard Green: A

94
00:14:58.200 --> 00:15:00.120
Laurie Goodman: Housing credit availability in DEC

95
00:15:00.150 --> 00:15:06.240
Richard Green: Yeah, yeah. So tell us a little bit about that and what I, what I will do is put a link to show people the picture.

96
00:15:06.330 --> 00:15:07.950
Laurie Goodman: What caught me. Yeah. So what we did.

97
00:15:07.950 --> 00:15:08.430
Is

98
00:15:10.560 --> 00:15:16.500
Laurie Goodman: What we did is, this goes back to what probability of default. Are we prepared to tolerate because I think this is just

99
00:15:16.830 --> 00:15:39.540
Laurie Goodman: Absolutely critical. So basically, what we did is we did sort of this was actually methodological be fairly straightforward. What we did is we did two giant look up tables, one for 2001 2002 mortgages, one for 2005 2006 mortgages by debt to income ratio loan to value ratio FICO score and

100
00:15:40.710 --> 00:15:42.930
Laurie Goodman: Whether or not the loan is a risky product.

101
00:15:44.430 --> 00:16:01.200
Laurie Goodman: That is that, you know, whether it has a short week whether you know loan payment jumps dramatically, or they're having prepaid penalties or it's negative amortization. And so we didn't want to look up tables, one for sort of traditional products and then one for non traditional

102
00:16:02.370 --> 00:16:03.210
Laurie Goodman: Products with

103
00:16:04.530 --> 00:16:16.350
Laurie Goodman: With sort of risky features and then for each of the giant look up tables we looked at historical performance of the 2001 2002 data historical performance in the 2005 2006 data waited. The

104
00:16:17.760 --> 00:16:27.330
Laurie Goodman: Data as a 90% probability. The 2005 2006 data as a 10% probability and came up with what we call the

105
00:16:27.750 --> 00:16:40.740
Laurie Goodman: The ex ante probability of default for mortgages and every given in any given origination quarter. So for each quarter for each quarter mortgage production we map we mapped it into essentially our for look up tables.

106
00:16:43.440 --> 00:16:50.430
Laurie Goodman: Traditional products risky products 2005 2006 traditional products risky products and then map and then mapped in

107
00:16:50.730 --> 00:17:01.830
Laurie Goodman: The probability default. And then we said, Okay, let's say we didn't have it as risky products, we only had traditional products and that differential was essentially our product risk differential

108
00:17:03.000 --> 00:17:05.100
Laurie Goodman: So the whole service. So the

109
00:17:07.140 --> 00:17:21.480
Laurie Goodman: And what it does is so in 2001 2002 the ex-ante probability of default with something like 12% it went up to about 17% in 2006 2007 and it's now well less than 6%

110
00:17:21.960 --> 00:17:38.130
Laurie Goodman: And if you look at the product risk, you find that almost all the increase from 2001 2002 two 2006 2007 was product risk that is borrower characteristics didn't really change that much. It's just that you introduced risky products which expect

111
00:17:40.020 --> 00:17:48.000
Laurie Goodman: And those risky and those risky products. I had a much higher probability of default and then now there's almost no product risk in the market left

112
00:17:48.480 --> 00:17:51.900
Richard Green: Right, it's let's remind our students. What are risky products.

113
00:17:51.960 --> 00:17:56.670
Laurie Goodman: What are some products are sort of subprime mortgages, where the payment is

114
00:17:56.670 --> 00:18:09.570
Laurie Goodman: Fixed for two or three years and then jumps dramatically. It's negative amortization products were essentially you pay less than the interest rate on the mortgage. So your principal actually grows, the first few years.

115
00:18:09.960 --> 00:18:22.170
Laurie Goodman: Its interest only mortgage is where you don't pay down any of the principal it's mortgages with hefty prepay penalties were essentially once you get in, you can't get out

116
00:18:23.670 --> 00:18:31.260
Laurie Goodman: So it's basically the grab bag of products that have what I'll call non traditional features.

117
00:18:31.920 --> 00:18:38.640
Richard Green: So do you think these products. Let's talk about like a negative and product. You think that's ever an appropriate product for borrowers take off.

118
00:18:44.760 --> 00:19:01.560
Laurie Goodman: Their answer is there are some subset of borrowers, for whom it is appropriate, but it is a very, very small subset. And so I'm not sure that it should be ever a standardized product sold in the capital markets, but if a bank wants to make a loan to

119
00:19:03.180 --> 00:19:04.980
Laurie Goodman: A guy who's just finished.

120
00:19:06.960 --> 00:19:15.660
Laurie Goodman: Medical School. Who's got or who's just finished his internship is about to start practice who's just signed something who doesn't

121
00:19:17.430 --> 00:19:22.140
Laurie Goodman: Who's expecting to make a lot of those expecting to make a lot of money very quickly. But right now, doesn't

122
00:19:23.880 --> 00:19:37.140
Laurie Goodman: Doesn't have a whole lot there. There are some system circumstances in which is appropriate, but it's very rare for that for that product. You have to know for certain that that person has a fast growing source of income for instance.

123
00:19:37.830 --> 00:19:40.260
Laurie Goodman: Yeah, it's a different world. I mean,

124
00:19:40.560 --> 00:19:45.960
Richard Green: 30 years ago, we used to talk about these things because we thought that we were in an inflationary environment.

125
00:19:46.530 --> 00:19:56.070
Richard Green: And so tell it was a big problem because if everybody's income was going to go up by 5% a year in nominal terms and you're paying a real interest rate of

126
00:19:56.850 --> 00:20:13.230
Richard Green: 3%. But that meant that it was 8% it meant that people who actually knew could afford a house couldn't afford the house the DTI was too high at the beauty and the love that. And now we're in a world of basically no inflation and so those products plus sensible.

127
00:20:13.530 --> 00:20:18.480
Laurie Goodman: Yes, you have to assume that the income is going to rise very, very quickly. And so he said to me.

128
00:20:18.720 --> 00:20:29.670
Laurie Goodman: Are there a large enough group of borrowers, for whom this makes sense. The answer is probably not. But it could be a niche product, but it's sort of a product that could be in a bank's own portfolio, where they eat their own cookie.

129
00:20:30.240 --> 00:20:30.720
Richard Green: Right well

130
00:20:30.780 --> 00:20:45.930
Richard Green: And so that gets to that was a prelude to the next question is, what, what do you think about the impact of Dodd Frank on the mortgage market and the whole has been a positive and negative, neutral, did they get it more or less right if they go too far. They're not go far enough.

131
00:20:49.020 --> 00:20:53.070
Laurie Goodman: I think Dodd Frank itself has been a huge help. I think the

132
00:20:54.480 --> 00:21:05.370
Laurie Goodman: The quote you know the qualified withdraw, which basically says, hey, you can't make these non traditional products that have a qualified mortgage was a tremendous help

133
00:21:06.300 --> 00:21:15.600
Laurie Goodman: Not because it ban the products to begin with because the market had already done that the market already taken action and said we're not going to buy these products.

134
00:21:16.350 --> 00:21:30.810
Laurie Goodman: Right now, we just don't. Yeah, we're just not sure enough about, you know, given given all that's happened. We're just scared to buy these products. But what it did is it for stalled a rewrite of these products and it just made it much more

135
00:21:33.600 --> 00:21:46.980
Laurie Goodman: Much more. Not so much made it less economic for banks to offer these products to our borrowers because they've got they've got the liability risk associated with the fact that the borrower said, oh, you said that you know

136
00:21:48.030 --> 00:21:49.530
Laurie Goodman: You borrow come back and sue.

137
00:21:49.890 --> 00:21:50.460
So,

138
00:21:52.830 --> 00:22:03.330
Richard Green: No. So I was thinking I'd be curious about it. I shouldn't say some of us, I think that once you get rid of the toxic products and I'll call them toxic non traditional

139
00:22:04.860 --> 00:22:09.420
Richard Green: The need for consumer protection beyond that is pretty small, and you

140
00:22:09.600 --> 00:22:12.750
Richard Green: Don't allow people to be making decisions and so

141
00:22:13.110 --> 00:22:19.440
Richard Green: Once you've got rid of the complicated exotic toxic, whatever you want to call them products.

142
00:22:19.860 --> 00:22:32.940
Richard Green: You should allow lenders and borrowers to come to an agreement about what's appropriate underwriting on alone. And when you impose any thing on top of that, I think that may be a step to foreign service protection.

143
00:22:33.720 --> 00:22:35.340
Laurie Goodman: I would agree with you.

144
00:22:36.810 --> 00:22:44.970
Laurie Goodman: I mean, I think you got to make sure that the borrower fully understands what they want the loan. They're taking out. But if that happens, um,

145
00:22:45.750 --> 00:22:51.480
Laurie Goodman: That's what I got a fixed rate self amortizing mortgages. You know what your payment is going to be for the life of the mortgage, it's

146
00:22:51.510 --> 00:22:52.890
Richard Green: Pretty straightforward product.

147
00:22:53.700 --> 00:22:54.420
Laurie Goodman: Right, right.

148
00:22:55.440 --> 00:23:08.640
Laurie Goodman: I know, I know. I agree with that. And so once you've gotten rid of the non traditional products. Um, yeah, I agree there's very little need for consumer protection. I mean, you, you do want to make sure that the borrower.

149
00:23:11.490 --> 00:23:22.920
Laurie Goodman: One additional restriction, which was not part of Dodd Frank. But implementing Dodd Frank the Consumer Financial Protection Bureau decided that there should be a hard 43 debt to income.

150
00:23:23.250 --> 00:23:41.340
Laurie Goodman: Limit on mortgages, which is a rule that I know never made any sense to either one of us, because it's like why would you do that that's really stupid because if you can do an over 43 data into mortgage with a lower probability and default. Why wouldn't you make that mortgage instead

151
00:23:43.980 --> 00:23:46.920
Laurie Goodman: CFP is looks like it's

152
00:23:49.530 --> 00:24:06.360
Laurie Goodman: finally going to get rid of that 43 debt to income ratio role of. Fortunately, it wasn't that rule wasn't as detrimental as it could have been because they basically said, oh, GSA mortgages aren't aren't subject to this role because of something called the GIC patch.

153
00:24:07.590 --> 00:24:13.530
Laurie Goodman: They're proposing to essentially get rid of the 43 DTI and get rid of the patch. So it puts both

154
00:24:16.230 --> 00:24:34.830
Laurie Goodman: Books private label of it puts more mortgages inside conventional mortgages underwritten by the Jesse's and not underwritten by the GI sees at on the same footing. That is private label loans and loans and bank portfolio or now would be on the same footing as Jesse well

155
00:24:36.300 --> 00:24:54.180
Richard Green: So let's let's now come to where we are right now mortgage market in a time of covert, how have you seen covered influence the market. Do you think it's working well. You think it's working badly. Do you think in some ways it's working well in some ways it's working badly.

156
00:24:55.980 --> 00:24:56.640
Laurie Goodman: Choice see

157
00:24:57.930 --> 00:25:13.290
Laurie Goodman: So here's what's working well about the more niche market. So first of all, homeowners were less impacted than the population as a whole. There, by and large, more affluent. The, the toll on the employment.

158
00:25:14.340 --> 00:25:19.500
Laurie Goodman: Sort of renders have been far more impacted by layoffs than homeowners.

159
00:25:19.980 --> 00:25:33.090
Laurie Goodman: Homeowners or less on far less apt to be in the most vulnerable industries in general homeowners or less impacted by unemployment, the homeowner unemployment rate is only about 80% of the national average. Historically, anyway, then

160
00:25:34.410 --> 00:25:41.010
Laurie Goodman: The GIC that FHA, and then and then Congress move very very quickly with forbearance, which basically

161
00:25:42.000 --> 00:25:56.250
Laurie Goodman: Allow the borrower allowed borrowers who are in trouble to essentially defer payments on their mortgage, which has been very powerful. I think the original thought was 25% of the borrowers would take advantage of it. The actual number has been more like

162
00:25:56.940 --> 00:26:06.030
Laurie Goodman: Seven to 8% but certainly, you know, that is provided a very important outlet and the fact that everyone moves so quickly is very, very positive.

163
00:26:07.620 --> 00:26:11.610
Richard Green: Interesting that even of those seven and 8% a bunch of those people are still making them roughly

164
00:26:12.000 --> 00:26:14.370
Laurie Goodman: About 25% of those are still paying

165
00:26:15.510 --> 00:26:15.720
Laurie Goodman: It.

166
00:26:17.160 --> 00:26:19.770
Richard Green: Up but I thought it was worth getting that that little detail.

167
00:26:21.090 --> 00:26:21.750
Laurie Goodman: And then

168
00:26:23.790 --> 00:26:25.980
Laurie Goodman: Purchase applicant and because it because

169
00:26:27.000 --> 00:26:36.630
Laurie Goodman: Because the Fed has East so dramatically and interest rates are at their lowest level ever you've had a huge increase in the number of

170
00:26:37.170 --> 00:26:48.990
Laurie Goodman: People looking to buy their home looking to buy a home, including first time homebuyer so the NBA purchase application in depth is actually higher than it has been in previous years at the same time.

171
00:26:50.430 --> 00:26:56.700
Laurie Goodman: Home prices continue to rise. So that's all working really, really well. And of course borrowers home.

172
00:26:57.210 --> 00:27:04.950
Laurie Goodman: Borrow and of course home prices haven't risen as quickly as interest rates of fall and so more people can afford to buy

173
00:27:05.370 --> 00:27:21.120
Laurie Goodman: debt to income ratios have come down. That said, here's what's not working the credit box has tightened dramatically. It's much harder for if you've got a sort of middling credit score. It's much harder to get a mortgage than it was before.

174
00:27:22.680 --> 00:27:24.330
Richard Green: And it was already for to do it.

175
00:27:24.540 --> 00:27:34.320
Laurie Goodman: Already hard, but it was guys gotten much harder and it's gotten Eve and also hard to refinance your mortgage. So if you have a more if you already have a mortgage with Fannie and Freddie why

176
00:27:34.860 --> 00:27:48.240
Laurie Goodman: It should be hard, or why you shouldn't be able to get a lower rate on that mortgage is beyond me. The Jesse's already have the risk on your mortgage. Why wouldn't they give you a lower rate and reduce their risk. So that's

177
00:27:49.320 --> 00:27:55.110
Laurie Goodman: So I think the tightening of the credit box has been very dramatic impacts.

178
00:27:57.000 --> 00:28:08.310
Laurie Goodman: Minority borrower black and Hispanic borrowers more than it impacts white borrowers because, by and large, black and Hispanic borrowers tend to have lower credit scores and the biggest

179
00:28:09.180 --> 00:28:17.970
Laurie Goodman: And higher debt to income ratios and the tightening has actually been in the, especially in the credits for dimension, but to a lesser extent in the debt to income.

180
00:28:18.990 --> 00:28:19.470
Laurie Goodman: Dimension.

181
00:28:20.700 --> 00:28:21.480
Richard Green: So let's talk about

182
00:28:21.840 --> 00:28:29.550
Richard Green: I want to pivot, a little bit based on that. That last sentence I know your centers also been doing a lot of work on the block wife homeownership gap and it's very

183
00:28:29.580 --> 00:28:30.930
Richard Green: Frustrating thing.

184
00:28:31.740 --> 00:28:45.510
Richard Green: To look out the gap. I believe now is every bit as big as it was maybe even bigger with when the Fair Housing Act was passed in 1968. What did you have any thoughts about things we might do to ameliorate this

185
00:28:46.110 --> 00:28:58.440
Laurie Goodman: Yeah, I mean, it's a very, very difficult issue. But yes, you're right. The gap is every bit as large as not larger. And I think there's a number of things that can be done to ameliorate it

186
00:28:59.790 --> 00:29:08.370
Laurie Goodman: We actually have a very, very narrow view of credit, we use the credit score from the credit bureaus. Well, guess what. So, um,

187
00:29:08.670 --> 00:29:09.060
Which was

188
00:29:10.170 --> 00:29:12.780
Richard Green: A five year old out of them, something like that.

189
00:29:14.040 --> 00:29:15.090
Laurie Goodman: Yeah, that is it. Yes, and

190
00:29:15.210 --> 00:29:33.180
Laurie Goodman: That's exactly right. So right now the versions being used for mortgages is the version that was designed in the late, late 90s. So there's not so you know there's so student loan debt isn't isn't there's only one kind of student loan debt. There's no differentiation there.

191
00:29:35.100 --> 00:29:43.950
Laurie Goodman: Medical medical data has been shown to be extremely unproductive that still in those models, there have been a lot of advances in

192
00:29:45.150 --> 00:29:54.930
Laurie Goodman: The credit scoring models, none of which are incorporated into the more into the mortgage process. Although Fannie and Freddie have taken some steps on their own. To do so, but

193
00:29:55.410 --> 00:30:10.650
Laurie Goodman: Not, not as much as they could. But what the main. The biggest thing that's missing from credit scores is actually, you think, well, gee, what's the more predictive of my ability to pay a mortgage than anything else. How about whether or not I paid my rent.

194
00:30:12.570 --> 00:30:17.010
Laurie Goodman: That is not included in the credit score.

195
00:30:17.460 --> 00:30:26.730
Laurie Goodman: Because initially they didn't have the information. And now, and it wasn't, including the original models because there is no information the credit bureaus are starting to try to get that information.

196
00:30:26.970 --> 00:30:35.370
Laurie Goodman: But they have it on so few of the loans that it's not about as powerful as predictors of poor, but if you take, but if you take a mortgage borrower who's

197
00:30:36.000 --> 00:30:46.950
Laurie Goodman: We've done this exercise where we looked at a mortgage borrowers made two years of on time payments and said, what is the probability of making the next three years. It's really, really high.

198
00:30:47.310 --> 00:30:48.330
Laurie Goodman: That is like

199
00:30:48.390 --> 00:31:01.530
Laurie Goodman: 99.5% but if you take a borrower who's missed one payment. The problem is probability and default goes from like point 5% to 5% if he misses two payments, it goes to

200
00:31:01.920 --> 00:31:09.840
Laurie Goodman: 20% over the next three years. And if he misses three or more. It's like 50% so it just goes up exponentially and you think that, you know, with

201
00:31:10.200 --> 00:31:18.540
Laurie Goodman: Most people's rent payments, not too dissimilar to what they inquire for their mortgage payment she'd seen the same pattern. So if you have a borrower who either doesn't

202
00:31:18.930 --> 00:31:31.020
Laurie Goodman: Have a credit score. It was a low credit score because he's a fairly new user of credit, but he has two years of on time mortgage payments that should be a great predictor and we're not using it.

203
00:31:32.040 --> 00:31:40.920
Richard Green: But one of the one of the stunning things to me is in the presence of eviction moratoria how people are still paying their rent.

204
00:31:41.940 --> 00:31:51.570
Richard Green: We just did a study of Los Angeles and we basically found there were only two groups of people who were not paying their rent that the rate that they were before. And those are people who

205
00:31:51.600 --> 00:32:01.200
Richard Green: lost their jobs or people who got coven and everybody else, you had 95% on time rent payment, which is sort of what

206
00:32:01.290 --> 00:32:14.370
Richard Green: The general on time rent payment rate is. So yeah, I mean, the other thing is I. People talk a lot about moral hazard in the mortgage business and what it's something I worried a lot about and

207
00:32:14.880 --> 00:32:22.410
Richard Green: Something that really changed my mind about it. What was the financial crisis, as we saw so many people millions and millions of people.

208
00:32:22.860 --> 00:32:33.060
Richard Green: Who are severely upside down on their houses were even take it even given the credit, credit. So on the rational thing for them to have done would have been to walk away.

209
00:32:33.630 --> 00:32:37.410
Richard Green: The really rational thing would have been to buy another house first and then walk away.

210
00:32:38.190 --> 00:32:44.880
Richard Green: And they didn't do it. We basically found right and I remember asking you to do this when we were in DC together.

211
00:32:45.750 --> 00:32:58.650
Richard Green: Looking at people who are upside down on their houses and conditional on that if they were current where they any more likely to default. The next period, then people were right side up and they were, but I have miniscule amount. And it's like, I mean if

212
00:32:58.830 --> 00:33:01.530
Richard Green: The trigger happened and then we're going to do it and the others weren't

213
00:33:02.310 --> 00:33:12.510
Richard Green: And so, you know, I think we are seeing sort of on the business side of things we do see moral hazard is an issue but on the consumer side, it just doesn't seem like that big a deal to me.

214
00:33:13.050 --> 00:33:19.560
Laurie Goodman: And fortunately, you know, that's actually one of the big lessons in my view of the policymakers have absorb this time around, because in

215
00:33:19.860 --> 00:33:28.740
Laurie Goodman: Sort of 2008 2009 or so concerned about moral hazard. Oh, we got to require a lot of documentation, because we're worried about moral hazard.

216
00:33:29.040 --> 00:33:37.140
Laurie Goodman: People are just going to take advantage of this time it was forbearance, no questions asked. I mean, we had to attest to the fact that you had hardship, but

217
00:33:38.130 --> 00:33:50.100
Laurie Goodman: Or could have hardship, but it was a pretty minimal. And in fact, you know, you look at the low number of borrowers taking advantage of for barons, because people who can pay well by and large will pay

218
00:33:50.730 --> 00:34:01.080
Laurie Goodman: So I mean I but. And to their credit, you know, there was no it was like, oh, that Institute of forbearance policy, there wasn't a oh yeah we got to require the following 27 pieces of documentation first

219
00:34:01.320 --> 00:34:07.200
Laurie Goodman: I think that was one of the big sort of in my mind, that was the biggest lesson learned from 2008 you

220
00:34:07.260 --> 00:34:07.470
Richard Green: Know,

221
00:34:07.920 --> 00:34:12.960
Richard Green: And this is really good that people learned it. So I want to finish with it up.

222
00:34:14.070 --> 00:34:19.170
Richard Green: Slightly know it's it's considerably different question for the line of questions at

223
00:34:19.230 --> 00:34:19.710
Richard Green: This point

224
00:34:19.740 --> 00:34:23.490
Richard Green: It's just I see you've lived in New York City, the New York metropolitan area for a long time.

225
00:34:24.480 --> 00:34:36.930
Richard Green: And you know there are people who are running off to New York now and we do see people you know that the vacancy rate Manhattan is rate residential vacancy rate has written a levels, probably not seen since the 70s. So there's no data at the moment.

226
00:34:37.620 --> 00:34:42.090
Richard Green: It's hurting but but longer right are you bullish bearish or neutral of New York.

227
00:34:44.190 --> 00:34:45.930
Laurie Goodman: That's a hard question. I'm

228
00:34:49.770 --> 00:34:53.310
Laurie Goodman: Sorry, so I am actually bullish on housing period.

229
00:34:53.910 --> 00:35:07.170
Laurie Goodman: Everywhere I am less bullish on housing in New York than I am, many other places because I think the fact that people can work from home more so you only have to come in, you know,

230
00:35:07.650 --> 00:35:16.410
Laurie Goodman: Two days a week or three days a week, means that at the margin, you're prepared to move out of the city, a little bit more quickly or not move back in as quickly

231
00:35:19.860 --> 00:35:26.910
Laurie Goodman: And in addition, sort of those taxes and people were already moving out of New York, long before covert 19. I mean, I think the

232
00:35:27.780 --> 00:35:45.420
Laurie Goodman: Changes and the changes in the tax law that went into into effect at the end of 2017 with the lack of with the limits on option of salt, state, local taxes had a huge impact on high tax states. So that's, you know,

233
00:35:45.930 --> 00:35:46.530
Although Laurie.

234
00:35:48.600 --> 00:36:04.050
Richard Green: I have to tell you. Listen, dr appt at a difference difference regression. On that note, we have only one year of data, but we have the 2018 IRS migration data and we did difference difference and you can identify the effect of the state level abstractions. There's such variation

235
00:36:04.500 --> 00:36:06.150
Richard Green: Depending on where and we found nothing

236
00:36:06.600 --> 00:36:15.510
Richard Green: We found no change in the trend now their husband a trend about migration from New York from a long time, but we saw no acceleration and that trend.

237
00:36:15.840 --> 00:36:16.680
Laurie Goodman: Oh, interesting.

238
00:36:16.890 --> 00:36:21.750
Richard Green: Result of that law. But yeah, maybe I can present this at an Arca thing or something but

239
00:36:22.380 --> 00:36:23.490
Laurie Goodman: I love to see

240
00:36:24.780 --> 00:36:25.920
Richard Green: Like habit is it was

241
00:36:25.980 --> 00:36:32.310
Richard Green: One year of data. So, you know, it does take a while for people to actually approve themselves and so on.

242
00:36:33.270 --> 00:36:34.710
Richard Green: Yeah, but we

243
00:36:35.640 --> 00:36:44.370
Laurie Goodman: Have very, I thought that these sort of composition of the Exodus might have changed with more higher income tax.

244
00:36:45.300 --> 00:36:49.590
Richard Green: You know, it's funny in California 2018 we actually saw the opposite, we saw

245
00:36:50.160 --> 00:36:51.570
Richard Green: People move in and low income people.

246
00:36:51.570 --> 00:36:52.110
Richard Green: Move out

247
00:36:53.280 --> 00:36:55.410
Richard Green: And that's because the half the cost of housing is just

248
00:36:55.410 --> 00:36:58.740
Richard Green: So mean that pushes people out. I have no doubt.

249
00:37:00.120 --> 00:37:14.160
Richard Green: About that and the other thing I find interesting about, you know, kind of taxes is to to even feel us the slightest blip on with the, I mean that the mortgage interest deduction was basically clawed back by about 90% with the 2017

250
00:37:14.400 --> 00:37:14.940
Laurie Goodman: Oh, yeah.

251
00:37:15.750 --> 00:37:27.030
Richard Green: Have you felt that, you know, we had a little earthquake here in Los Angeles on Friday night that earthquake. I felt that a lot more than I felt any impact of the text Korea jack job second house prices.

252
00:37:27.600 --> 00:37:30.930
Laurie Goodman: Oh yeah, I didn't expect to see any. I mean, sort of the thing about the

253
00:37:31.980 --> 00:37:38.370
Laurie Goodman: mortgage interest deduction is that a lot of people with sort of low and

254
00:37:38.940 --> 00:37:56.370
Laurie Goodman: Medium incomes weren't itemizing before and now almost none. And now, of course, none of them are itemizing and hiring somebody how you're hiring people aren't itemizing either, but out of those, but most of the people who, um, but no. The biggest difference in the

255
00:37:57.420 --> 00:37:58.560
Laurie Goodman: isn't actually

256
00:38:00.420 --> 00:38:09.120
Laurie Goodman: So the salt the salt tax is far more impactful than than more than the mortgage interest deduction, just in terms of kind of the dollars and cents.

257
00:38:09.240 --> 00:38:09.780
Laurie Goodman: Yeah, but

258
00:38:10.980 --> 00:38:26.160
Laurie Goodman: Sort of the people for whom the mortgage interest deduction was perhaps the most meaningful where those who sort of made make around $75,000 a year and yeah didn't. What have you done before and don't do doc now.

259
00:38:26.970 --> 00:38:37.290
Laurie Goodman: But a huge percentage of them are going to be homeowners anyway in their entire tax bill when their tax bill went down by and large, as a result of this, I know there was no impact and I didn't expect they expect to see what

260
00:38:39.690 --> 00:38:43.380
Richard Green: Okay, well, Laurie Goodman. Thank you for spending some time with us.

261
00:38:43.920 --> 00:38:45.090
Richard Green: always appreciate it.

262
00:38:45.360 --> 00:38:46.980
Richard Green: This was great and

263
00:38:48.210 --> 00:38:50.310
Richard Green: I look forward to actually I'm going to see you tomorrow.

264
00:38:51.030 --> 00:38:51.660
Laurie Goodman: Yes.