Tom Hoenig

Hoenig, the son of a local plumber and a graduate of St. Benedict’s College (now Benedictine College) in Kansas and Iowa State University, began serving on Oct. 1, 1991 as a chief executive of the Tenth District Federal Reserve Bank in Kansas City, Kan. He had begun serving as an economist in the banking supervision area for the Kansas City Fed in 1973. This past March he announced his plan to retire from the board on Oct. 1, as required under the Federal Reserve Board’s rules for presidents.

He is a trustee of the Ewing Marion Kauffman Foundation and serves on the boards of Midwest Research Institute and Union Station.

Hoenig was called by U.S. Rep. Ron Paul in July to provide testimony before the Domestic Monetary Policy and Technology Subcommittee, which Paul leads. The hearing, “Impact of Monetary Policy on the Economy: A Regional Fed Perspective on Inflation, Unemployment and QE3,” was called to provide oversight of liquidity operations undertaken by the Federal Reserve and also to explore price stability and employment.

As a member of the banking supervision area during the banking and farm crisis of the 1980s, Hoenig relied on his past experiences while explaining the role of the Federal Reserve and his support of cuts to the federal funds rate as well as other liquidity actions taken in response to the crisis.

“However, though I would support a generally accommodative monetary policy today, I have raised questions regarding the advisability of keeping the emergency monetary policy in place for 32 months with the promise of keeping it there for an extended period,” Hoenig told the subcommittee.

“I have several concerns with zero rates. First, a guarantee of zero rates affects the allocation of resources. It is generally accepted that no good, service or transaction trades efficiently at the price of zero. Credit is no exception. Rather, a zero-rate policy increases the risk of misallocating real resources, creating a new set of imbalances of possibly a new set of bubbles.”

During the farm and banking crisis, he was involved in the closing of more than 300 regional and community banks.

“Farms were lost, communities were devastated, and thousands of jobs were lost in the energy and real estate sectors,” he noted. “I am confident that the highly accommodative monetary policy of the decade of the ’70s contributed to this crisis.”

In addition to his objections to immediate zero rates, Hoenig believes unemployment is soaring at this time at least in part because interest rates were held artificially low during the early 2000s.

“In 2003, unemployment at 6.5 percent was thought to be too high,” he said. “The federal funds rate was continuously lowered to a level of 1 percent in an effort to avoid deflation and to lower unemployment. The policy worked in the short term.

“The full effect, however, was that the U.S. experienced a credit boom with consumers increasing their debt from 80 percent of disposable income to 125 percent. Banks increased their leverage ratios — assets to equity capital — from 15-to-1 to 30-to-1. This very active credit environment persisted over time and contributed to the bubble in the housing market. In just five years, the housing bubble collapsed and asset values have fallen dramatically. The debt levels, however, remain, impeding our ability to recover from this recession. I would argue that the result of our short-run focus in 2003 was to contribute to 10 percent unemployment five years later.”

Monetary policy, he argued before the subcommittee, cannot solve every problem.

“I believe we put the economy at greater risk by attempting to do so,” he added.

A few weeks prior to his testimony, Hoenig was a guest lecturer at Purdue University, his remarks titled “Sowing the Seeds: Monetary Policy and the Ag Economy.” Video of that discussion is embedded below.

The FDIC is an independent agency, created by Congress, tasked with maintaining stability and public confidence in the nation’s financial system. It does so by insuring deposits, providing oversight of financial institutions and managing receiverships. Since the FDIC began insuring deposits in 1934, no depositor has lost any money as a result of a bank failure.

The agency is governed by a five-person board. Members of the body are nominated by the President and confirmed by the U.S. Senate. No more than three members may share the same political affiliation. The board is currently comprised of three members due to retirements.

Hoenig is currently a resident of Kansas City.

Average home values have dropped in every quarter since they peaked at around $240,000 in the summer of 2006, a year before the bottom fell out of the market and values began to plummet. A downturn, therefore, is nothing new — housing values have gone nowhere but down for nearly five years now. What is new is the accelerated rate of fall. Tumbles became a slow trickle in 2009, but the pace at which values are now dropping approaches that felt during the panicked early months of the recession.

The only housing market in the country that has actually seen rising prices since the start of 2010 is the Honolulu metropolitan area. The Pittsburgh area saw prices remain fairly constant from 2010 to the first quarter of 2011. Meanwhile, Detroit, Atlanta, Ocala, Fla., and a number of other metropolitan areas that have otherwise seen economic stagnation and a mass exodus of residents were particularly hard-hit.

Zillow has this chart, among others, depicting overall losses in value:

Image courtesy Zillow.com

The foreclosure rate is also up from last year and is approaching peak levels of more than 0.1 percent (that is, one in a thousand homes being foreclosed upon each month), for a total of two million homes mired in the foreclosure process during the first quarter of this year. In a sign that the foreclosure trend isn’t looking to get any better, the country saw a further 1.5 million homes in serious mortgage delinquency and therefore on the brink of foreclosure during the quarter. A record 28.4 percent of homeowners were underwater on their mortgages.

The troubling housing numbers aren’t the only recent sign that the economy is getting worse rather than better. On Friday, the Bureau of Labor Statistics (BLS) released its latest unemployment figures, showing that new unemployment filings are way up. The BLS has determined that the overall unemployment rate is now back to 9 percent, up from 8.8 percent at last reckoning.

The hard numbers betray a grim economic outlook perhaps no better exemplified than by McDonald’s recent national job push. Several commentators have noted that out of an applicant pool of 1 million people, McDonald’s hired 62,000, leaving the fast food giant with a lower acceptance rate than that boasted by Harvard. The fast food industry compensates employees at around half the national median salary for all workers in the job force.

Meanwhile, the Chinese yuan continues to rise against the dollar, driving increased consumer prices in the U.S. and, some prognosticators have argued, a quickening of the year in which China finally overtakes the United States as the world’s top economic superpower.

But at The Atlantic, Daniel Indiviglio builds the relevant chart. Starts remain low — appropriately low — given the weakness in the housing market. They are just 2.2 percent higher than the pace from a year ago. Given the overhang of foreclosed homes and the fact that the United States just came through the wake of a massive housing bubble, building should remain low for some time.

“We are sitting on a time bomb,” the mortgage analyst said — a huge increase in unconventional home loans like balloon mortgages taken out by consumers who cannot qualify for regular mortgages. The high payments, he continued, “are just beginning to come due and a lot of people who were betting interest rates would come down by now risk losing their homes because they can’t pay the debt.”

He would have given great testimony at the current Senate hearings on subprime mortgage lending. The only problem is, he said it in 1981 — when soon after several of the alternative mortgage products like those with adjustable rates and balloons first became popular.

When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of “risky exotic and subprime mortgages,” he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.

Almost every new form of mortgage lending — from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages — has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.

[...]

[T]he mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, “Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.”

If you guessed Austan Goolsbee, the new head of the White House Council of Economic Advisers, in 2007, then you would have guessed correctly. (How did you do that?)

Of course, in hindsight, this looks like a crazy thing to say, and the New York Times column reads like one giant face-palm. By 2007, the subprime bubble had already started to burst, with tens of thousands more homeowners each month undergoing foreclosure than expected. And the crisis did not cede, only growing worse as unemployment tracked up nationwide. The rate of foreclosure has accelerated through this year, when an estimated 1 million families might lose their homes. The Center for Responsible Lending, cited in Goolsbee’s piece, estimates that the housing bust has cost communities of color a generation of gains in wealth.

And the opinion piece seems particularly faulty for two oversights. First, the data cited. Here’s the paragraph explaining the research Goolsbee cites to support his argument:

A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.

But, of course, 2000 marked the end-date of real economic growth for the middle class — the trouble for both the housing market and incomes started soon thereafter. Between 1970 and 2000, everyone got richer: Everyone sensibly predicted that their earnings would go up, so they bought houses they could not quite afford, but lo and behold their earnings did go up, meaning they were able to pay their mortgages.

For the past decade, incomes and wealth have stagnated for most Americans outside the very top income bracket. That means, after 2000, millions sensibly predicted their earnings would go up, given the growth in the 1990s. They purchased homes they could not quite afford. But for most Americans, incomes stagnated — they never went up — so those homes never became affordable.

That brings us to the second real oversight of Goolsbee’s piece: He does not really mention the housing price bubble. Americans couldn’t afford all of those $485,000 two-bedrooms 20 minutes outside of Phoenix, not just because their incomes did not go up, but because those homes were wildly overpriced. Tricky mortgage products with low or nonexistent down payments made Americans think they could afford them, and most Americans believed that at least if they lost their job they would be able to sell their home for much more than they paid for it. Since 2007, that has not been true.

Even if monetary policy was not a principal cause of the housing bubble, some have argued that the Fed could have stopped the bubble at an earlier stage by more-aggressive interest rate increases. For several reasons, this was not a practical policy option. First, in 2003 or so, when the policy rate was at its lowest level, there was little agreement about whether the increase in housing prices was a bubble or not (or, a popular hypothesis, that there was a bubble but that it was restricted to certain parts of the country). Second, and more important, monetary policy is a blunt tool; raising the general level o f interest rates to manage a single asset price would undoubtedly have had large side effects on other assets and sectors of the economy. In this case, to significantly affect monthly payments and other measures of housing affordability, the FOMC likely would have had to increase interest rates quite sharply, at a time when the recovery was viewed as “jobless” and deflation was perceived as a threat.

That gives me occasion to publish this astonishing chart of the housing bubble posted by Kevin Drum, showing prices remaining stable until about 2003 before heading skyward. (The Federal Reserve started hiking interest rates before housing prices peaked, in June, 2004.)

An interesting paper flagged by Felix Salmon argues that the primary cause of the housing bubble was an over-investment in mortgage-finance products, priced too low because of a misunderstanding of their risk: “The rise of private-label [mortgage-backed securities] exacerbated informational asymmetries between the financial institutions that intermediate mortgage finance and MBS investors. The result was overinvestment in MBS that boosted the financial intermediaries’ profits and enabled borrowers to bid up housing prices.”

The government program is starting fewer trial modifications, moving on to fewer permanent modifications and kicking out more homeowners. Thus far, HAMP has kicked out 47 percent of participants. This comes the same week as a ProPublica investigation found widespread problems with the program, meant to significantly reduce monthly mortgage payments for distressed homeowners. Many have had their payments reduced by negligible amounts. Many have gotten bogged down in paperwork. Many have never received a rejection. Indeed, financial companies’ own programs to modify mortgages have worked far better.

According to government data, 89% of single-family detached houses are owner-occupied. Meanwhile, 83% of apartments are rented. There is a certain logic to this. An apartment building provides an economy of scale for a landlord that a suburban housing development doesn’t.

The answer: Probably not individuals who cannot afford to own their homes and pay their mortgages anymore. (Of course, many individuals do rent out their homes. But it does require some work, and some willingness to deal with the hassle of it. What if the tenant breaks things? What if they do not pay their rent on time? Who do you go to for legal work? etc.)

The question becomes whether big rental companies and developers, with the credit to purchase lots of properties and the savvy to make a business of it, will be willing to step in. Of course, the government has all sorts of carrots to convince them to do so. And it seems many subsidized rental programs are going well, if they are oversubscribed.

But the recession has forced cuts to the program, meaning it serves far fewer families than need it. Katz writes about the panic the shortage has created:

[I]n a suburb of Atlanta last week, the near-riot took place in a very, very long line, estimated at 30,000 people or more, for a government rent-aid program. … The applicants converged at a shopping plaza in East Point, just south of Atlanta, in the hope of obtaining a copy of the coveted form. East Point is a quick train ride from Atlanta, where voucher waiting lists have been closed for years. Wednesday’s release of applications for East Point’s 455 available vouchers drew a crowd from all over the region and even out of state, a mass of people almost the size of the entire population of East Point itself. Those at the head of the line had begun to gather days earlier.

But it’s not just low-income families that benefit from the program. More vouchers might improve housing market overall, making them an even better public subsidy:

Neighborhoods south of downtown Atlanta have been decimated by foreclosures, with abandoned houses sprouting kudzu on virtually every block. Real-estate investors are buying these homes in bulk from lenders or at courthouse auctions for pennies on the dollar and fixing them up, hoping to rent them out to Section 8 voucher families. …

In Atlanta, investors can potentially get an annual Section 8 income of $10,000 or $15,000 a year for houses that currently sell for little more than that. Voucher holders can browse on gosection8.com to look at current listings, like an attractively renovated two-bedroom house that an investor bought at a foreclosure auction for $17,000 in May and is now trying to rent at $895 a month. These real-estate investors are counting on a steady supply of customers.

• Barbara J. Desoer, president of Bank of America Home Loans
• Ingrid Gould Ellen, professor of urban planning and public policy at New York University’s Wagner Graduate School of Public Service
• Bill Gross, co-founder and co-chief investment officer of PIMCO
• Mike Heid, co-president of Wells Fargo Home Mortgage
• S.A. Ibrahim, chief executive officer of Radian Group
• Marc H. Morial, president of the National Urban League
• Alex Pollock, fellow at the American Enterprise Institute
• Lewis Ranieri, chairman of Ranieri and Co.
• Ellen Seidman, executive vice president of ShoreBank Corp. and chair of the board at the Center for Financial Services Innovation
• Michael A. Stegman, director of policy for the Program on Human and Community Development of the John D. and Catherine T. MacArthur Foundation
• Susan Wachter, professor of financial management, real estate and regional planning at the University of Pennsylvania’s Wharton School
• Mark Zandi, chief economist of Moody’s Analytics

Affordable housing advocates criticized the list and argued against their exclusion, Zach Goldfarb at The Washington Post reports:

“Apparently being a community organizer qualifies you to be president, but it’s not good enough to be part of HUD and Treasury’s think tank on housing,” said NCRC chief executive John Taylor, whose group works with hundreds of community organizations to promote access to financial services for low- and middle-income people.

The criticism by affordable-housing advocates was notable because the Obama administration has so far paid much more attention to their concerns than previous administrations have. Advocates, for instance, had credited the administration with listening to community groups that argued that the government must do more to embrace rental housing for those who cannot afford to buy a home.

“We believe that this opaque, overbroad, and punitive policy, as conceived by Fannie Mae, is a poor use of taxpayer dollars  and will unnecessarily include individuals who are not choosing to default on their mortgage,” they write. “Furthermore, this policy is one of many which seems to run counter to the national need to stem the tide of foreclosures which are devastating communities across our nation.”

In June, Fannie Mae announced new penalties against defaulters it deems strategic. The ailing government-sponsored enterprise said it will lock out from getting a Fannie-backed mortgage anyone who could afford to pay her mortgage but chooses not to, and defaults instead, for seven years. Fannie also said it will go after strategic defaulters in court, a policy it put into effect on July 1: “Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.”

But Fannie never said how it would determine who was defaulting strategically, and who was merely a few months away from going broke and belly up on the mortgage as well. As I have written before, despite the flashy media stories, there is little evidence that a rash of strategic defaulters are sending the keys back to the bank and heading on lavish vacations or buying new SUVs. Most homeowners who default are deeply underwater — meaning they owe far more on their mortgage than their home is worth, and if they sold the home they would still owe the bank. And the vast majority have incurred job loss or another income shock leaving them unable to afford their home.

Conyers and Kaptur argue that Fannie and Freddie are merely “pursuing expensive litigation against a vulnerable population when there appears to be little to no economic incentive is questionable at best.”

The letter is strongly worded: “At a time of record deficits and a nation crying for the government to get its finances in order, it is unclear why Fannie Mae is proposing to use taxpayer dollars to pursue legal judgments against individuals who will lose or have lost their homes, have wrecked their credit rating, and likely have little or no remaining monetary assets.”