You're shooting back towards the US.

We've discussed in class about how one of the

causes of financial crisis was that many low credit people were encouraged to buy
homes, and then they subsequently defaulted when home houses dropped. So what
regulations has the Dodd-Frank Act put in place to prevent this from happening
again? Well, the Dodd-Frank Act wanted to get banks responsible for ability to pay
and responsible for checking out borrowers. They didn't take their word for it.
They shouldn't take their word for it. So there's been a lot of Dodd-Frank set in
motion. A lot of regulatory rule making that is supposed to prevent that thing from
happening again. And the rule-making puts specific requirements on mortgages that
are qualified, namely that QRMs, as they're called in Dodd-Frank lingo, mortgages
that are not subject to the five percent retention rule. So, basically, mortgages
follow the guidelines that were issued in 2014 by regulatory agencies in the United
States. And the rules specify that the debt payments, your monthly debt payment
cannot be more than 43 percent of your monthly income. That's a rule now. It's
still high. What's that? It's still high. That sounds awfully high to me. So you
take home a paycheck, and you give almost half of it. Poverty level is 33 percent.
If your housing costs the 33 percent of your monthly income, it's considered
poverty level. Yeah. Well, of course, it depends on what your income is. If your
income is $10 million a year, there's no problem. And they have to verify that you
have a job. They have to verify what your total debt payments are. They have to
check on things like, you may have alimony payments or other obligations that go
into the calculation. So it's going to be harder. That should keep prices more
under control. At least you won't be able to borrow to build these prices up. What
about regulations that may tamper with all the home prices? Well, this brings me
back to China and the US when they put on short sale restrictions that prevented
sellers who doubted the prices from selling. These things may be important. Maybe
government should defend the price of the stock market if it's in a free fall
panic. They tend to do that. The problem is that the public starts to expect the
government to do that, and then they lose their sense of connection to reality,
especially true in China. There have been big drops in home prices at certain times
in China, and the public gets very upset. When you bought a house just a year ago
or six months ago, and now it's selling for less than you paid. So people get angry
and they protest to their local government. This has led to some pressure being put
on firms to try to keep the price up. And so it leads again to public expectations
that prices can never fall. This has been a factor in a number of countries. They
think that real estate is such a fundamental right of citizens that a competent
government will never let the price fall. But then that just produces a high
equilibrium level price. So it could be that prices will stay high for a long time
because of this perception, and there'll be a bad investment. I personally think
that for many people housing, an owner occupied home is not the greatest investment
because it takes up so much of your time and energy to worry about this. You'd be
better living in an apartment building and just enjoying, like you can go out to
dinner more. You go to the entertainment or not be out there fixing things. And
then people imagine that there are benefits. But who knows whether they're right or
not? Maybe there are neighborhood benefits. Maybe living in a nice neighborhood
with friendly neighbors is invaluable. Tax benefits? Well, there is a tax subsidy
right to homeownership in the United States. And I think the purpose of creating a
tax benefit to homeownership is to encourage homeownership because it's long been a
theory that homeowners are better citizens. Vectors even research showing that if
you ask people, who is the mayor of your town? More people can answer that who are
homeowners or renters. Surprising, lot of people don't know those things, so
they're more connected. But, see, there's a downside to this. So you're connected
to your community. You know the mayor. You know of somebody else in the government.
And you know what the people are doing there. That's good. But the other side of it
is you can't be as flexible and taking a new job as you might have been. You might
have involved your moving or just moving a little bit. You take a job on the other
side of town, and now you're commuting 45 minutes every day. I just moved to the
other side of town. It's almost a taste thing, whether homeownership is a great
idea or not. Maybe it should be subsidized a little bit. Maybe not as much as it
is. Oh, by the way the other problem with the tax subsidy for homeownership is that
it takes the form of a deduction. But most people don't take deductions in the
United States because you have to reach a certain threshold before it's worth doing
that. There's something called the standard deduction. The schedule. So especially
low income people often miss even taking their mortgage payment as a deduction. So
they don't have the same incentives. It doesn't profit them as much. So it becomes
a subsidy for rich people to buy a house. Maybe that's not what we want. Paging on
the conversation about the Dodd-Frank Act and comparing that to the implementation
of the Sarbanes-Oxley Act to kind of help usher in an era of internal controls and
accountability in our firms. What are your thoughts about Dodd-Frank? Did it go far
enough, and should bankers and those who administer home loans, should they not be
complaining, given the impact that the low income mortgages had on society? Yeah.
Well, business people like to complain, especially when it comes to regulators. And
I can imagine feeling that way myself. But I think that it's probably a better
world after Dodd-Frank. The so-called liar's loans that were prohibited, that was a
bad thing, where they weren't checking whether someone even had a job who was
taking out a loan. And then they packaged these mortgages into securities and then
just sold them to unsuspecting innocents. So we've made real progress. Could there
be more progress? Absolutely. I'm not sure it all comes from legislation. I think
it's comes from innovation and finance. I think there should be better markets for
real estate. In fact, I've tried to start them. I mentioned this in class that I
worked with the Chicago Mercantile Exchange to create futures markets for single
family homes. That hasn't taken off. It's there. It's still going after 10 years.
But I would like to see it a better market like that. Now, if we had better markets
for real estate prices that are liquid and well-defined so that you had a better
idea what prices levels really are, we might develop new risk management vehicles
for homeowners, like home equity insurance. That would insure you against the loss
and that market value of your home. That would have been a huge benefit in the
financial crisis. These are things for the future. One theme I made in this course
is that innovation proceeds slowly over decades and centuries. Things like
insurance came in very slowly over centuries, over millennia, actually. You can
define it. These ideas, which seem very clear and sound after the fact, looked very
experimental before they happened. So I think that we have to get our mortgage
institutions, our risk management institutions sharpened so that they work better
to prevent this kind of crisis. This crisis was a mistake. The crisis of 2008/2009
was a big mistake. But we have to have the right institutions to prevent that from
happening again.