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.
