The Goodspeed Update

The map to the right shows the overwhelming majority of subprime loans and foreclosures in New York City have been in minority neighborhoods. (Created by NEDAP via NY Times) The map tells an often-overlooked fact: the subprime crisis has hit minority neighborhoods harder than white ones.

The banking industry sometimes claims the differences in lending between whites and blacks and Hispanics are due to differences in credit and income. Although income plays a role, last year the New York Times reported that after controlling for the size of the loan and income of the borrower, blacks were 2.3 times more likely and Hispanics two times more likely than whites to have a high-cost loan. They cite the example of two neighborhoods in Detroit, both with median incomes around $50,000 — 70% of loans in the black neighborhood had high interest rates, while only 17% did in the white neighborhood.

Another study found that homeowners in upper income black neighborhoods (income above 120% AMI) were twice as likely to have subprime loans as homeowners in low-income (income below 80% AMI) white neighborhoods. Almost 40% of the loans in the affluent black neighborhood were subprime, versus 18% in the low income white neighborhood.

One article (PDF) thinks it is precisely that statistic that suggests something more - whether discrimination or a simple lack of prime lenders — is to blame:

The finding that upper income African-American borrowers rely more heavily on the subprime market than low-income White borrowers suggests that a portion of subprime lending is occurring with borrowers whose credit would qualify them for lower cost conventional prime loans. There is also evidence that the higher interest rates charged by subprime lenders cannot be fully explained solely as a function of the additional risks they bear. Thus, a greater presence by mainstream lenders could possibly reduce the high up-front fees and interest rates currently being paid by residents of low-income and minority neighborhoods.

The Times speculates in addition to a lack of prime lenders, other reasons could include aggressive sales in minority neighborhoods, less financial saavy, and lower net worth of minority lenders. Regardless, the stark numbers show that while the worst redlining may be behind us, the problem of equitable housing finance for urban neighborhoods still eludes us.

> NYTimes: What’s Behind the Race Gap?
> W. Post: Subprime Mortgages and Race
> HUD: Subprime Market Growth and Predatory Lending (PDF)

The wide-ranging housing bill recently passed by Congress includes a program to help homeowners avoid foreclosure, money for community development, and other measures. One of its important provisions is a one-time tax benefit of $7,500 (or 10% of the home’s purchase price, whichever is less). Unlike many of the existing tax benefits of home ownership, there’s an income limit and the benefit must be repaid, although without interest. The income limit is $75,000 for singles and $150,000 for couples.

The National Association of Realtors explains the the pay-back requirements:

It is not a full credit because you do have to pay back this amount over a 15 year time period from the second year. The payback provisions also have many conditions, which we are further researching. But in the worst case, you would need to pay back the $7,500 over a 15 year time span from 2010. So in your 2010 tax filing, you would need to pay $500. Even in the worst case scenario of paying back the tax credit fully over a 15 year time span, the tax credit is still a huge benefit to homebuyers. First, money today is worth more than money tomorrow - far more than money 15 years from now. Money loses value over time due to inflation and from the interest income one would receive on that money before fully paying it back.

Let’s take a look at the effects of the existing homeowner tax benefits.

This 2004 report from the National Low Income Housing Coalition has some interesting analysis. This graph breaks down the estimated size of the various housing tax benefits, including the mortgage interest and property tax deduction and housing capital gains exemption. They point out these three benefits were more than double HUD’s total outlays in 2004.

The particularly interesting things about these benefits is how deeply regressive these benefits are. When housing programs and tax benefits are factored, we spend 2.2 times more money on housing for the richest two-fifths of the population than the poorest two-fifths. The richest fifth of society — with incomes above $86,585 in this 2004 report — get over $50 billion in benefits.

Since the benefit is something of a sacred cow, I don’t expect it to go away anytime soon. We should just keep them in mind when debating funds for affordable housing or the equity of congestion charges.

> National Low Income Housing Coalition: Changing Priorities: The Federal Budget and Housing Assistance 1976 – 2005
> USAToday: Housing rescue bill may fall short; Who benefits?
> The Tax Foundation: Who Benefits From the Mortgage Interest Deduction?

NIMBY (Not In My Back Yard) activists are one of the most important and least understood issues in contemporary American urban planning. A recent national survey found that roughly one-quarter of all Americans reported they or someone in their family has actively opposed a development project. Although opposition to development is widespread and use of the term common, like gentrification, the word can elude definition. To some, NIMBYs are people who oppose environmentally harmful facilities like garbage dumps, to others they are people who oppose development perceived to lower their property values, and some think they’re just people with “unreasonable” complaints about development. One article I read argued we needed lots more NIMBYism to force capitalism to rethink the very necessity of things like waste incinerators.

I think the term implies a failure of urban planning and public participation. But first, let’s take a look at how it’s usually viewed.

The term barely makes a mention in some of the field’s standard texts. The Practice of Local Government Planning, a bestselling standard reference manual for urban planners, mentions it only in connection to siting facilities with a large environmental impact, like waste treatment plants. Donald Elliott’s reformist A Better Way to Zone mentions the term, but provides no help grappling with the concept. Elliott describes NIMBYism as when “elected officials deny a proposed development that substantially meets all applicable standards because of the opposition of immediate neighbors.” Writing from his perspective as a land use lawyer, he argues there is “usually” a technical reason for rejection, but concedes “they sometimes deny even without a good reason.” He divides NIMBYism into two flavors, early and late. The first is to be expected and weighed by the elected officials making the decisions, the second prevented. The author argues the solution to the problem is to eliminate opportunities for public involvement. After all, an administrative reviewer would simply correct the technicality and allow the entire project to pass. In order to “depoliticize” the zoning approvals process, citizen input opportunities should be trimmed. “Not holding a public hearing when it could easily be abused is as much a part of good governance as holding public hearings at the planning, zoning, and initial review stages.”

I disagree with his definition and solution. First, focusing on technicalities misses the point. Urban development is sufficiently complex and politicized that determined opponents have no shortage of methods to block development, the legal facts of the case aside. The problem has to do with the character of the opposition. Second, cutting some hearings would certainly ease the burden on public officials who have to sit through them and listen to complaints, but it does nothing about the underlying frustrations. His proposal begs the question: if there is no hearing, will anyone be disgruntled? I tend to believe they will. If people are unhappy a highly technocratic process would simply intensify opposition earlier or through other channels, such as lawsuits.

Samuel Stanley thinks that the problem is to distinguish between “legitimate concerns” and “reactionary hostility to anything that might upset the status quo,” arguing “The role of the planning board chair and planning staff is to guide the members of the planning board and city council through this process to ensure that community benefits are maximized and external costs minimized.” This characterization also misses the essence of the problem. What is a legitimate concern to one person is an irrational hostility to another.

The key to understanding NIMBYism comes from political science, not the technicalities of zoning. NIMBYism occurs when a politically unrepresentative minority exacts unreasonable costs on the larger community, up to and including blocking otherwise supported developments. This definition comes from a provocative article by Morriss P. Fiorina titled “Extreme Voices: A Dark Side of Civic Engagement” that appears in this text.

In the article he describes the case of a private school in Middlesex, Massachuessets, that sought a modest expansion of their campus for new athletic fields. He estimates the plan would have originally won approval through a general referendum by a margin of perhaps two or three to one, however “the subsequent proceedings were dominated by a small group of citizens implacably opposed to the Middlesex plan.” Over a seven year process of which he estimates 1/2 to 1% of Concord’s 10,800 voters participated in meetings the school spent at least $400,000 and the city over $10,000 in consultants and fees. He concludes “to some, the preceding case illustrates grass-roots democracy … to others, the preceding case illustrates the opposite of grass-roots democracy: a few ‘true believers’ were able to hijack the democratic process and impose unreasonable costs–fiscal and psychological–on other actors as well as the larger community.” According to a 2006 Boston Globe article, the plan was still being debated 13 years after the original proposal.

To Fiorina, the problem with the events lies not in the minutia of zoning, but the unrepresentative outcome. He concludes that “the kinds of demands on time and energy required to participate politically are sufficiently severe that those wiling to pay the costs come disproportionately from the ranks of those with intensely held extreme views. Given that people cannot be forced to participate, the alternative is to get the costs down.” Ironically, the solution to the “extreme voices,” empowered by participatory processes is more participation: “Thus, the only possibility is to go forward and raise various forms of civic engagement to levels where extreme voices are diluted.”

Understandably, the people who suffer the financial consequences of NIMBYism have the clearest understanding of the problem — and its solution. The Urban Land Institute (where I am working this summer) is a professional organization made up mostly of real estate developers. The institute has published two separate works for the benefit of their members on opposition to development, Winning Community Support for Land Use Projects in 1992 and Breaking the Development Logjam in 2006. The first identifies three sources of opposition to development: a lack of information, a lack of involvement, and a true conflict of interests. The manual identifies the remedies for each source: public information, public participation, and negotiations. The more recent Breaking the Development Logjam comes from a similar perspective, observing

The guardedness, disillusion, and cynicism in evidence will not be put to rest by standard procedures that call for a public hearing or two. Citizens know that such hearings typically offer few opportunities for understanding the real effects of proposed developments, and almost no chance for reasonable discourse about the pros and cons of a proposed project.

The book argues its “premise is that when people are well informed about community development in general, and proposed project in particular, the likelihood of securing their support for a project greatly increases.”

I’ll discuss the implications of this conclusion for the planning profession in a subsequent post on Planetizen. The bottom line here is that people serious about changing the status quo in American cities must have a robust understanding and strategy for handling NIMBYism. Thanks to rapid changes in the mechanics of planning — the goals of written plans and character of the zoning — higher density, pedestrian and transit-oriented neighborhoods are increasingly legal again. What remains is the public engagement strategy to minimize the size and ranks of the vocal minority and convince American communities they’re the right form of development for our communities.

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

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

What regulations could be considered?

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

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

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

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

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

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

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

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

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

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

Over 1,000 D.C. homes are now equipped with smart electrical meters that record their hourly electricity usage, encourage conservation during peak times, and even automatically turn down the heat or A/C when electricity is most expensive. The meters are part of a pilot program starting this week to study how “price signals” can encourage consumers to save electricity by providing them with more information about the amount and price of power consumed.

Although the generation of electricity has been deregulated in Washington since 2001, about 99% of PEPCO customers subscribe to the Standard Offer Service, the rate charged to users who have not selected an alternate source. The cost of the electricity is calculated from the average rate of contracts from power plants, plus an administrative charge and taxes. The rate is changed yearly and only adjusted twice a year. This means that even though the generated supply and consumer demand for electricity can range widely, consumers have little incentive to modify their behavior. The idea is that by charging more to consumers during peak times (or, offering discounts for those who conserve at those times) will save consumers money and help PEPCO reduce the peak demand.

From the PEPCO announcement, here are the three pricing options the program is testing:

Under Hourly Pricing, electricity prices will vary hourly. The prices will be set a day ahead, based on prices in the “day ahead” wholesale market operated by PJM Interconnection, the regional power grid. Prices will be available on the project’s Web site or displayed real-time on “smart” thermostats. Based on recent wholesale market trends, hourly prices are expected to exceed conventional power supply prices only about a third of the time within a year, with lower prices the remainder of the time. Customers will be notified of high priced hours a day in advance through an automated phone call, an e-mail, text page or “smart” thermostat notification.

With Critical Peak Pricing, peak prices will be in effect for four hours on critical peak days, of which there are about 15 each year. These critical peak hours during which higher prices are charged will be limited to about 60 hours per year. Customers will be notified of these events the day before through an automated phone call, an e-mail, text page or “smart” thermostat notification. Prices during the critical peak hours will be substantially higher than conventional rates but will be offset by lower prices during the remaining 8,700 hours of the year.

Under Critical Peak Rebate, participants will continue to pay the same generation charges as the Standard Offer Service charged by Pepco. During critical peak events, however, customers can earn rebates by reducing their consumption below what they would normally have used during those times. Customers will be notified of these events the day before through an automated phone call, an e-mail, text page or “smart” thermostat notification.

Presumably the results from the program will help PEPCO decide which of the above policies to eventually extent to all residential customers. For now the program is closed since the program website reports they received a “tremendous” response from the 1,400 customers invited to participate one year ago. Although there’s not much there yet, one of the project’s sponsors, the D.C. Office of the People’s Council, has launched a blog to track the program.

In South Africa I experienced a related method for encouraging conservation: pre-paid electricity. We would purchase a fixed amount of electricity from an authorized seller such as a supermarket, and they would provide us a confirmation code we would enter into the meter in our rented home. The meter would recognize the code and display the total amount of electricity purchased, and slowly tick down the balance as you used it. In fact, the Wall Street Journal reported last year that “A half-dozen utilities are trying prepaid programs now, but that could accelerate quickly.” We found that a conspicuous meter in the kitchen ticking away our money made us highly aware of our power consumption. Participants in the Arizona program described by the Wall Street Journal cut their power usage 12%.

What about consumers generating their own power? Although PEPCO allows consumers to generate power for the grid from renewable technology through their Green Power Connection program, SproutDC pointed out in a previous comment that D.C. does not offer rebates or incentives for the installation of solar power systems like California or New Jersey.

More
> Power Cents DC
> DC Office of the People’s Council: D.C. Electric “SMART METER” Pilot Program Announcement, Blog
> PEPCO: Residential Pilot to Test “Smart Metering” for DC Electric Customers
> PR Newswire: Smart Metering and Demand Response Pilot Goes Live in Washington D.C.
> Wall Street Journal: “New Ways to Monitor Your Energy Use“

A recent visitor to this website asked this question on a previous post:

hello, i am a New Yorker who relocated moved to DC last year. in my decades of riding the NYC subway, at $70/month unlimited rides, I have probably experienced a handful of delays and/or major issues with the tracks. in my one year of having lived in DC, there has been an average of one major delay per week due to track or other issues —- and I pay over $4.00 per one-way trip.

can you offer some thought or explanation as to why this is, in the context of the two train systems?

Although I know far more about the history and operations of Metrorail than the New York City Subway, here’s my general reaction on the reasons this rider has experienced more delays on Metro:

1. System redundancy: When I have traveled to New York, I often noticed construction work or service disruptions on the subway. However, unlike the Metro, the system has multiple tracks on most routes and many tunnels to route trains during disruptions. Metro, on the other hand, has much more limited flexibility - when a train breaks down, there’s no alternate track or tunnel for those behind it to travel on. Here’s some thoughts about why that is.
2. Funding differences: WMATA is generally under-funded and has no dedicated funding source - they go begging each year for tax dollars from Maryland, Virginia, and D.C. In the words of a fellow planner: “Over the years, WMATA has had to make a choice: make needed track repairs for mid-life preventative repairs or pay for additional rollingstock to meet massive demand. WMATA chose for years to purchase additional rollingstock.” I don’t know the history of New York Subway funding, but today the system is run by a huge state agency.
3. System age: The New York City subway is very old. This means that they have lots of maintenance to do, but it also means they have been at it for a while. The Metro is just hitting middle age, meaning lots of things are breaking for the first time now, at the same time they are facing the strain of record ridership.

What About the Price?
The issue of cost raises several issues, First, I should remind the commenter that the New York City subway, like New York City itself, is unique by American standards. The city has a unique history, namely it grew explosively before the auto age, setting a template for high density, transit-oriented development. As a result, the city’s density is off the charts, low auto ownership off the chart, transit use off the chart, and the activity level on its streets generally higher than anywhere else in America. I’m always surprised by former New Yorkers who somehow think their city is a reasonable standard to compare any other city in America. (You can’t get a good slice of pizza, everything closes early, your subway is worse, etc.) In fact, you should expect other American cities to be very different than New York.

That said, there are several reasons Metro’s fare is higher. First, they charge high fares because they need the money and they can. Second, their ridership peaks heavily, meaning most riders travel during peak times. The New York Subway’s riders are spread out more throughout the day, and the system is open 24 hours. Operating a system with high peaks is much more expensive than a system with more even ridership in terms of trains, personnel, and infrastructure. Third, given the Metro’s size and relationship to the region, for many riders it functions more like a commuter rail system. In fact, despite the graduated fares my analysis showed the longest distance riders are getting the best deal — under $0.50 a mile, lower than the IRS mileage rate.

These are just some quick thoughts regarding the differences, and I’d be interested in other perspectives.

In casual conversations, the convenience of the New York Subway is the gold standard for American public transit, and for good reason. Although it has flaws, it is enormous and a relative bargain for travelers. We also haven’t built anything like it for over 100 years. That’s why I’ve been spending my time writing about what we need to change to increase investment in alternatives to the road and freeway network.

Billionaire T. Boone Pickens is getting attention for his highly publicized energy plan for America.

Half the plan is spot-on. America needs to switch from fossil fuels to renewable energy sources, like wind or solar.

The other half is wrong. He argues we should power our automobiles with domestically-produced natural gas. This will not significantly reduce greenhouse gas emissions, will require expensive new infrastructure, and will create a new problem when we eventually run out of natural gas. However, the biggest reason it makes no sense is this: Burning natural gas to generate electricity has an overall efficiency of 60 percent, but natural gas vehicles are 15 to 20 percent efficient. Charging electric cars off a natural gas-powered grid is far more efficient than driving natural gas vehicles.

My concerns are shared widely, but I thought they deserved repeating.